Multiple Choice Questions
1. Bonds that have an option exercisable by the issuer to retire them at a stated dollar amount prior to maturity are known as:
A) Convertible bonds.
B) Sinking fund bonds.
C) Callable bonds.
D) Serial bonds.
E) Junk bonds.
2. The contract between the bond issuer and the bondholders, which identifies the rights and obligations of the parties, is called a(n):
A) Debenture.
B) Bond indenture.
C) Mortgage.
D) Installment note.
E) Mortgage contract.
3. Bonds with a par value of less than $1,000 are known as:
A) Junk bonds.
B) Baby bonds.
C) Callable bonds.
D) Unsecured bonds.
E) Convertible bonds.
4. Installment notes payable that require periodic payments of accrued interest plus equal amounts of principal result in:
A) Periodic total payments that gradually decrease in amount.
B) Periodic total payments that are equal.
C) Periodic total payments that gradually increase in amount.
D) Increasing amounts of interest each period.
E) Increasing amounts of principal each period.
5. A pension plan
A) Is a contractual agreement between an employer and its employees in which the employer provides benefits to employees after they retire.
B) Can be underfunded if the accumulated benefit obligation is more than the plan.
C) Can include a plan administrator who receives payments from the employer, invests them in pension assets, and makes benefit payments to pension recipients.
D) Can be a defined benefit plan in which future benefits are set, but the employer's contributions vary depending on assumptions about future pension assets and liabilities.
E) All of the above.
6. Operating leases differ from capital leases in that
A) For a capital lease the lessee records the lease payments as rent expense, but for an operating lease the lessee reports the lease payments as depreciation expense.
B) For an operating lease the lessee depreciates the asset acquired under lease, but for the capital lease the lessee does not.
C) Operating leases create a long-term liability on the balance sheet, but capital leases do not.
D) Operating leases do not transfer ownership of the asset under the lease, but capital leases often do.
E) Operating lease payments are generally greater than capital lease payments.
7. Collateral agreements:
A) Are required for all bonds.
B) Are required for all notes.
C) Reduce the risk of loss for the holders of both bonds and notes.
D) Are only required if the bond or note has a term of more than ten years.
E) Are only required if the bond or note has a term of less than ten years.
8. Bonds can be issued:
A) At par.
B) At a premium.
C) At a discount.
D) Between interest payment dates.
E) All of the above.
9. A company may retire bonds by:
A) Exercising a call option.
B) The holders converting them to stock.
C) Purchasing the bonds on the open market.
D) Paying them off at maturity.
E) All of the above.
10. Amortizing a bond discount:
A) Allocates a part of the total discount to each interest period.
B) Increases the market value of the Bonds Payable.
C) Decreases the Bonds Payable account.
D) Decreases interest expense each period.
E) Increases cash flows from the bond.