1. Both bonds payable and notes payable are obligations that usually arise from
ID: 2525609 • Letter: 1
Question
1. Both bonds payable and notes payable are obligations that usually arise from borrowing money. This statement is
A. True
B. False
2. Which of the following entities recevies cash when a company borrows money through a bond issue?
A. Bondholder
B. Lender
C. Issuer
D. Resource Provider
3. The lender issues a bond certificate to the borrower. This statement is
A. True
B. False
4. Which of the following items is normally included in a bond certificate issued by a corporation?
A. The face value of the bond
B. The stated rate of interest
C. The term to the maturity date
D. All of the answers represent items that are normally included in a corporate bond certificate
5. A callable bond provides an option
A. For the issuer to repay the bond liability before the maturity date
B. For the issuer to extend the maturity date
C. For the lender to demand payment of the bond liability before the maturity date
D. For the lender to extend the maturity date
6. A provision of a bond certificate that requires a sinking fund is designed to protect the
A. Issuer
B. Federal Government
C. Lender
D. Borrower
7. A convertible provision in a bond certificate normally allows the
A. Issuer to convert a fixed interest rate to a varialbe interest rate
B. Borrower to convert short-term debt to long-term debt
C. Issuer's Chef Executive Officer (CEO) to convert stock option to debt
D. Bondholder to convert the bond investment into common stock investment
8. Limiting the amount of funds that a bond issuer can borrow to a specified percentage of total assests is an example of
A. A sinking fund provision
B. A convertible feature
C. A callable feature
D. A restrictive covenant
Explanation / Answer
1. The answer to this is "A. True". Both bonds payabl and notes payable are a frm of credit with similar accounting treatments. Notes payable are generally used for small, short-term borrowings whereas bonds are issued for high amount, long term borrowings.
2. The answer to this is "C. Issuer". In a bond issue, the issuing company receives the cash from the lender and issues a bond stating the right of the lender to repayment of the principl amount and the interest thereon.
3. The answer is "B. False". In a bond issue, the borrower issues the bond certificate to the lender, not the other way round.
4. The answer is "D. All of the answers represent items that are normally included in a corporate bond certificate". A bond certificate generally states the amount of the principal (also known as the face value of the bond), the rate at which the interest is payable on the bond along with the frequency of such payment and the life of the bond, i.e., when the bond will be repayed.
5. The answer is "A. For the issuer to repay the bond liability before the maturity date". A callable bond is a bond that gives the issuer an option to redeem the bond anytime upto the date of maturity.
6. The answer is "C. lender". A sinking fund is a means of repaying funds borrowed through a bond issue through periodic payments to a trustee who retires part of the issue by purchasing the bonds in the open market. This adds security to the issue as the issuer is less likely to default on the payments as they are smaller in amount as compared to the entire size of the issue.
7. The answer to this is "D. Bondholder to convert the bond investment into common stock investment". A convrtible bond is a bond which can be converted into equity shares of a company at the option of the bondholder, either on maturity or after a certain amount of time has passed.
8. The answer is "D. A restrictive covenant". To add security to an issue and reduce chances of default, often restrictive covenants are added to the issue, such as the maximum limit of funds that can be borrowed as a percentage of the total assets of the company.
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