20. When a corporation issues bonds, the price that buyers are willing to pay fo
ID: 2434408 • Letter: 2
Question
20. When a corporation issues bonds, the price that buyers are willing to pay for the bonds does not depend on which of the following belowa. face value of the bonds
b. market rate of interest
c. periodic interest to be paid on the bonds
d. denominations the bonds are sold
21. A corporation would not be successfully trading on equity if it gathered funds by
a. issuing common stock
b. issuing preferred stock
c. issuing notes
d. issuing bonds
22. One potential advantage of financing corporations through the use of bonds rather than common stock is
a. the interest on bonds must be paid when due
b. the corporation must pay the bonds at maturity
c. the interest expense is deductible for tax purposes by the corporation
d. a higher earnings per share is guaranteed for existing common shareholders
23. Which of the following is not an advantage of issuing bonds instead of common stock?
a. Tax savings result
b. Income to common shareholders may increase.
c. Earnings per share on common stock may be lower.
d. Stockholder control is not affected.
24. A bond indenture is
a. a contract between the corporation issuing the bonds and the underwriters selling the bonds
b. the amount due at the maturity date of the bonds
c. a contract between the corporation issuing the bonds and the bond trustee, who is acting on behalf of the bondholders.
d. the amount for which the corporation can buy back the bonds prior to the maturity date
25. Debenture bonds are
a. bonds secured by specific assets of the issuing corporation
b. bonds that have a single maturity date
c. issued only by the federal government
d. issued on the general credit of the corporation and do not pledge specific assets as collateral.
26. When the corporation issuing the bonds has the right to repurchase the bonds prior to the maturity date for a specific price, the bonds are
a. convertible bonds
b. unsecured bonds
c. debenture bonds
d. callable bonds
27. When the maturities of a bond issue are spread over several dates, the bonds are called
a. serial bonds
b. bearer bonds
c. debenture bonds
d. term bonds
28. The market interest rate related to a bond is also called the
a. stated interest rate
b. effective interest rate
c. contract interest rate
d. straight-line rate
29. When the market rate of interest on bonds is higher than the contract rate, the bonds will sell at
a. a premium
b. their face value
c. their maturity value
d. a discount
30. The interest rate specified in the bond indenture is called the
a. discount rate
b. contract rate
c. market rate
d. effective rate
Explanation / Answer
issuing common stock
issuing common stock
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