Question 1 The price of a bond issue is computed by adding the present value of

Question

Question 1

The price of a bond issue is computed by adding the present value of the face amount and the present value of the interest payments.

a. True

b. False

Question 2

The market price of bonds is expressed as a percentage of their face amount.

a. True

b. False

Question 3

The effective rate of interest is the same as the market yield.

a. True

b. False

Question 4

If the contract rate of interest is 10 percent and the market rate of interest is 11 percent, the bonds will sell at a premium.

a. True

b. False

Question 5

The maturity value of an issue of bonds payable must be the face value of the bonds.

a. True

b. False

Question 6

If the contract rate is higher than the market rate, the bonds will sell at discount.

a. True

b. False

Question 7

Both stock and bond investments have established maturity dates.

a. True

b. False

Question 8

If bonds payable are issued at a discount, subsequent changes in the market interest yield will change the amount of the discount on bonds payable account.

a. True

b. False

Question 9

Generally accepted accounting principles allow for the amortization of a bond discount using either the straight-line method or the effective interest rate method at the corporation's choice.

a. True

b. False

Question 10

Amortization of a bond discount allocates a portion of the bond discount to increase the interest expense of each period.

a. True

b. False

Question 11

If the effective interest rate in the market drops after an issue of bonds has been sold, the issuing company should not amortize the remaining premium on bonds payable

a. True

b. False

Question 12

A bond premium must be amortized which will cause an increase in the carrying value of the bond payable.

a. True

b. False

Question 13

A callable bond is more likely to be redeemed by the issuing corporation before it matures if the market interest yield has decreased.

a. True

b. False

Question 14

Compound interest is a repeated calculation of interest on the same principal value over a certain number of periods of time.

a. True

b. False

Question 15

If the bonds are redeemed at a price higher than the carrying amount, a loss must be recognized.

a. True

b. False

Explanation / Answer

Question 1

The price of a bond issue is computed by adding the present value of the face amount and the present value of the interest payments.

a. True

Question 2

The market price of bonds is expressed as a percentage of their face amount.

b. False

Question 3

The effective rate of interest is the same as the market yield.

a. True

Question 4

If the contract rate of interest is 10 percent and the market rate of interest is 11 percent, the bonds will sell at a premium.

b. False

Question 5

The maturity value of an issue of bonds payable must be the face value of the bonds.

a. True

Question 6

If the contract rate is higher than the market rate, the bonds will sell at discount.

a. True

Question 7

Both stock and bond investments have established maturity dates.

b. False

Question 8

If bonds payable are issued at a discount, subsequent changes in the market interest yield will change the amount of the discount on bonds payable account.

b. False

Question 9

Generally accepted accounting principles allow for the amortization of a bond discount using either the straight-line method or the effective interest rate method at the corporation's choice.

a. True

Question 10

Amortization of a bond discount allocates a portion of the bond discount to increase the interest expense of each period.

b. False

Question 11

If the effective interest rate in the market drops after an issue of bonds has been sold, the issuing company should not amortize the remaining premium on bonds payable

a. True

Question 12

A bond premium must be amortized which will cause an increase in the carrying value of the bond payable.

a. True

Question 13

A callable bond is more likely to be redeemed by the issuing corporation before it matures if the market interest yield has decreased.

b. False

Question 14

Compound interest is a repeated calculation of interest on the same principal value over a certain number of periods of time.

b. False

Question 15

If the bonds are redeemed at a price higher than the carrying amount, a loss must be recognized.

a. True

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