Chapter 17
Bonds and Long-Term Notes Payable
True / False Questions



A bond is a written promise to pay an amount identified as the par value of the bond
along with interest at a stated annual rate.
TRUE
Interest paid on bonds is not tax-deductible.
FALSE
An advantage of bond financing is that it does not affect shareholder control.
TRUE

An advantage of bond financing is that interest does not have to be paid.
FALSE

Both interest paid on bonds and dividends paid on shares are tax-deductible.
FALSE

Debentures have specific assets of the issuing corporation pledged as collateral.
FALSE

Callable bonds have an option exercisable by the issuer to retire them at a stated dollar
amount prior to maturity.
TRUE
A corporation can reserve the right to retire bonds early by issuing callable bonds.
TRUE
A bond's par value is the same as market value.
FALSE
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



Bond interest rates change as the market rate of interest changes.
FALSE
When the contract rate is above the market rate, a bond sells at a discount.
FALSE
A discount on bonds payable arises when a corporation issues bonds with an issue
price less than par value.
TRUE
17-1


The issue price of a bond is equal to the present value of all future cash payments to be
received from the bond.
TRUE
A finance lease obligation is a form of long-term liability.
TRUE
Multiple Choice Questions

An advantage of bond financing is:
A. Issuing bonds does not affect shareholder control.
B. Interest on bonds is tax-deductible.
C. Bonds can increase return on equity.
D. Bonds can create financial leverage.
E. All of these answers are correct.

A disadvantage of bonds is:
A. Bonds require payment of periodic interest.
B. Bonds require payment of principal.
C. Bonds can decrease return on equity.
D. Bonds may not create financial leverage.
E. All of these answers are correct.

Which of the following statements is true?
A. Interest on bonds is tax-deductible.
B. Interest on bonds is not tax-deductible.
C. Dividends to shareholders are tax-deductible.
D. Bonds never create financial leverage.
E. Issuing bonds will dilute shareholdings.

A bondholder who owns a $1,000, 10%, 10-year bond has the right to:
A. Receive dividends.
B. Receive $10 per year until maturity.
C. Receive $1,000 at maturity.
D. Vote.
E. None of these answers is correct.
17-2

Callable bonds:
A. Can be exchanged for a fixed number of the issuing corporation's common shares.
B. Do not require payment of interest over the life of the bond issue.
C. Are also called debentures.
D. Are usually not registered.
E. Have an option whereby the issuing corporation may redeem them under specified
conditions.

Secured bonds:
A. Are called debentures.
B. Have specific assets of the issuing corporation pledged as collateral.
C. Are backed by the issuer's general credit standing.
D. Are second to unsecured liabilities.
E. Are always callable.

Bonds that have interest coupons attached to their certificates, which the bondholders
detach when they mature and present to a bank for collection, are called:
A. Coupon bonds.
B. Callable bonds.
C. Serial bonds.
D. Convertible bonds.
E. Registered bonds.

Bonds owned by investors whose names and addresses are recorded by the issuing
corporation, and for which interest payments are made with cheques to the
bondholders, are called:
A. Callable bonds.
B. Serial bonds.
C. Registered bonds.
D. Coupon bonds.
E. Bearer bonds.

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.
17-3

Bonds that mature at different dates with the result that the entire debt is repaid
gradually over a number of years are called:
A. Registered bonds.
B. Bearer bonds.
C. Callable bonds.
D. Coupon bonds.
E. Serial bonds.

Debentures are:
A. Bonds secured by collateral agreements.
B. Unsecured bonds.
C. Redeemable bonds.
D. Another name for the bond indenture.
E. Assets used as collateral for bonds.

Bonds can be issued:
A. At par.
B. At a premium.
C. At a discount.
D. Between interest payment dates.
E. All of these answers are correct.

When a bond sells at a premium, it means that:
A. The contract rate is above the market rate.
B. The contract rate is equal to the market rate.
C. The contract rate is below the market rate.
D. The bond is secured by corporation assets.
E. The bond is always callable.

A bond sells at a discount when the:
A. Contract rate is above the market rate.
B. Contract rate is equal to the market rate.
C. Contract rate is below the market rate.
D. Bond is unsecured.
E. Bond is not registered.
17-4

The market value of a bond is equal to:
A. The present value of all future cash payments provided by a bond.
B. The present value of all future interest payments provided by a bond.
C. The present value of the principal of the bond.
D. The future value of all future cash payments provided by a bond.
E. The future value of all future interest payments provided by a bond.

A discount on bonds payable:
A. Occurs when a corporation issues bonds with a contract rate less than the market
rate.
B. Occurs when a corporation issues bonds with a contract rate higher than the market
rate.
C. Is recorded as a contra equity account.
D. Only occurs when unsecured bonds are issued.
E. Never happens in the real world.

A corporation may retire bonds by:
A. Exercising a call option.
B. Exercising a conversion option.
C. Purchasing bonds on the open market.
D. Exercising a call option and a conversion option.
E. Exercising a call option and purchasing bonds on the open market.
17-5

Bonds that give the issuer an option of retiring them before they mature are known
as:
A. Debentures.
B. Serial bonds.
C. Convertible bonds.
D. Registered bonds.
E. Callable bonds.

A lease:
A. Is a series of payments to property owners in exchange for use of the property.
B. Gives the lessee exclusive control over an asset's usefulness.
C. Allows a lessor to earn revenues from a rental property.
D. May be operating or finance.
E. All of these answers are correct.

An operating lease:
A. Is also called a rent-to-own lease.
B. Requires the lessee to record a leased asset and a lease liability.
C. Allows the lessee to report rent expense.
D. Is the economic equivalent of a purchase with a financing arrangement.
E. None of these answers is correct.
17-6
Matching Questions

Match each of the following terms with the appropriate definition.
Bonds that are scheduled for payment at a single
specified date.
The interest rate that borrowers are willing to pay and
2. Market rate of
that lenders are willing to earn for a particular bond with
interest
similar risk and terms.
3. Effective
Bonds that can be exchanged by the bondholders for a
interest method
fixed number of the issuing corporation's common shares.
Bonds that are backed by the issuer's general credit
4. Coupon bonds
standing.
Bonds that have interest coupons attached to their
5. Unsecured
certificates; the bondholders detach the coupons when they
bonds
mature and present them to a bank or broker for collection.
An accounting method that allocates interest expense
over the life of the bonds in a way that yields a constant
6. Bearer bonds
rate of interest.
Bonds that are made payable to whomever holds them;
7. Serial bonds
also called unregistered bonds.
8. Installment
Bonds that mature at different dates with the result that
note
the entire debt is repaid gradually over a number of years.
9. Convertible
An obligation requiring a series of periodic payments to
bonds
the lender.
The contract between the bond issuer and the
10. Bond
bondholder; it identifies the rights and obligations of the
indenture
parties.
1. Term bonds
17-7
1
2
9
5
4
3
6
7
8
10

Match each of the following terms with the appropriate definition.
1. Callable bonds
2. Bond
3. Secured bonds
4. Premium on
bonds
5. Carrying value
6. Annuity
7. Contract rate
8. Bond
indenture
9. Convertible
bonds
The interest rate specified in the bond indenture.
The contract between the bond issuer and the
bondholders; it identifies the rights and obligations of the
parties.
A written promise to pay an amount identified as the par
value of the bond along with interest at a stated annual
amount.
Bonds that have specific assets of the issuing corporation
pledged as collateral.
A series of equal payments occurring at regular time
intervals.
The net amount at which bonds are reflected on the
balance sheet.
Bonds that give the issuer an option of retiring them at a
stated dollar amount prior to maturity.
The difference between the par value of a bond and its
higher issue price.
Bonds that can be exchanged by the bondholders for a
fixed number of the issuing corporation's common shares.
17-8
7
8
2
3
6
5
1
4
9