MGMT 200 PURDUE 2026 EXAM QUESTIONS AND SOLUTIONS GRADED A+

MGMT 200 PURDUE 2026 EXAM QUESTIONS AND
SOLUTIONS GRADED A+
✔✔Convertible bonds allow the borrower to convert each
bond into a specified number of shares of common
stock
A. True
B. False - ✔✔B. B as in Bee as in Bfalse

Convertible bonds allow the bond HOLDER (the person who issued the bond) to
convert each bond into common stock.

This makes sense as only the company has the right to issue common stock

✔✔The term used for bonds that are unsecured as
to principal is
A. series bonds.
B. indenture bonds.
C. debenture bonds.
D.callable bonds. - ✔✔C. Debenture bonds

Unsecured Bond definition: Bonds (*debentures*) are not backed by collateral

✔✔The amount at a present time that is equivalent to a
series of payments and interest in the future.
A. Present value of a single amount
B. Future value of a single amount
C. Present value of an annuity
D. Future value of an annuity - ✔✔C. Present value of an annuity

This is basically a fancy way of saying the *price* of an annuity, since all an annuity is is
a series of payments in the future.

The price is also known as the *present value of the future cash flows*

✔✔What measurement should be used when reporting
long‐term liabilities on a balance sheet?
A. Present value of the present outflow
B. Present value of the future outflow
C. Future value of the present outflow
D. Future value of the future outflow - ✔✔B. Present value of the future outflow

This is basically saying the *price* of the long term liability is to recorded on the balance
sheet, as the *price* of something is just the *present value of the future cash flows*

,✔✔The price of a bond is equal to:
A. The present value of the interest only
B. The future value of the face amount only
C. The future value of the face amount plus the
future value of the stated interest payments
D. The present value of the face amount plus the
present value of the stated interest payments - ✔✔D. The present value of the face
amount plus the
present value of the stated interest payments

You can think of this on a timeline. If the price of something is the *present value of
future cash flows*, then you will take the present value of a series of payments AND
then the present value of the maturity value (or in this case the face value).

✔✔On January 1, 2018, San Bruno, Inc. issued twenty‐year bonds payable
with a face value of $50,000,000 and a face interest rate of 5 percent. The
bonds were issued with a market interest rate of 6 percent. Interest is
payable semi‐annually on January 1 and July 1. In calculating the present
value of the bond issue on January 1, 2018,
A. the 5 percent rate will be used to calculate the present value of
the face amount and the present value of the periodic interest
payments
B. the 6 percent rate will be used to calculate the present value of
the face amount and the present value of the periodic interest
payments.
C. a 3 percent rate will be used to calculate the present value of
the face amount and the present value of the periodic interest
payments.
D. the 6 percent rate will be used to calculate the present value of
the face amount and a 2.5 percent rate will be used to calculate
the present value of the periodic inte - ✔✔C. a 3 percent rate will be used to calculate
the present value of
the face amount and the present value of the periodic interest
payments

Since the payments are *semi-annual*, you take the market interest rate (typically given
to you as an interest rate convertible semi-annually) and divide it by *2* to get the semi-
annual rate

You then use this to calculate the present value of the bond

✔✔The market interest rate on bonds is lower than
the stated or face rate when bonds sell
A. at face value.
B. below face value.
C. above face value.

, D. at maturity value. - ✔✔C. above face value

This is known as a *premium* (in this case, carrying value will DECREASE to the $$$
amount of bonds sold; refer to lecture slides)

A *discount* is when the market interest rate is HIGHER than the stated interest rate
(this makes sense if you think about it; since the rate you are buying the bond at is
LOWER than the rate everywhere else, you're basically being offered a discount on the
price)
(in this case, carrying value will INCREASE to the $$$ amount of the bonds sold; refer
to lecture slides)

✔✔Bonds usually sell at a premium when
A. investors are willing to invest in the bonds at
rates that are lower than the stated interest
rate.
B. investors are willing to invest in the bonds at
rates that are higher than the stated interest
rate.
C. investors are willing to invest in the bonds at the
stated interest rate.
D. An unfavorable tax event will impact the buyer. - ✔✔A. investors are willing to invest
in the bonds at rates that are lower than the stated interest rate.

(premiums are when the MARKET RATE is lower than the STATED RATE)

✔✔If the market interest rate at the date of
issuance of a bond exceeds the face or stated
interest rate, the bond will probably be sold at a
premium.
A. True
B. False - ✔✔B. *finger gun retracts* No

A premium is when the MARKET RATE is *lower* than the STATED RATE.

Premium = MR < SR
Discount = MR > SR
Stated Rate = MR=SR

✔✔If bonds are issued at a premium, the face or
stated interest rate is
A. too low to attract investors.
B. lower than the market rate of interest.
C. higher than the market rate of interest.
D. adjusted to a higher effective rate of