Chapter 9 Q&A

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Liquidity is the ability to earn a satisfactory net income.
A. True
B. False

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Which of the following is not a true statement?
A. Companies that are believed to have high bankruptcy risk generally receive low credit ratings and must pay a higher interest rate for borrowing
B. As a company's level of debt increases, the risk of bankruptcy increases
C. Interest expense incurred when borrowing money, as well as dividends paid to stockholders, are both tax‐deductible
D. The mixture of liabilities and stockholders' equity a business uses is called its capital structure

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The higher the debt to equity ratio, the greater the financial risk the company is taking.
A. True
B. False

True

The mixture of debt and equity securities is generally the same for most companies.
A. True
B. False

False

A debt to equity ratio of 0.5 means that half of the company's assets are financed by creditors.
A. True
B. False

False (Creditors only refer to liabilities in respect to assets)

Callable bonds
A. can be redeemed by the issuer at some time at a pre‐specified price.
B. can be converted to stock.
C. mature in a series of payments.
D. can be redeemed by the bondholder at some time at a pre‐specified price.

Term bonds require payments in installments over a series of years.
A. True
B. False

False

The term used for bonds that are unsecured as to principal is
A. debenture bonds.
B. series bonds.
C. indenture bonds.
D. callable bonds.

Which of the following is not true regarding callable bonds?
A. This feature allows the borrower to repay the bonds before their scheduled maturity date.
B. This feature helps protect the borrower against future decreases in interest rates.
C. Callable bonds benefit the bond investor.
D. A bond can be both callable and convertible.

When the present value of a bond issue is calculated, both the present value of a single sum table and the present value of an annuity table must be used.
A. True
B. False

True

On January 1, 2018, Paddington Corporation issued ten‐year bonds payable with a face value of $400,000 and a face interest rate of 9 percent. The bonds were issued with a market interest rate of 10 percent. Interest is payable semi‐annually on January 1 and July 1. In calculating the present value of the bond issue on January 1, 2018,
A. the 9 percent rate will be used to calculate the present value of the face amount and the present value of the periodic interest payments
B. a 5 percent rate will be used to calculate the present value of the face amount and the present value of the periodic interest payments.
C. the 10 percent rate will be used to calculate the present value of the face amount and the present value of the periodic interest payments.
D. the 10 percent rate will be used to calculate the present value of the face amount and a 5 percent rate will be used to calculate the present value of the periodic interest payments

The price of a bond is equal to:
A. The present value of the interest only
B. The future value of the face amount only
C. The future value of the face amount plus the future value of the stated interest payments
D. The present value of the face amount plus the present value of the stated interest payments

The market interest rate on bonds is lower than the stated rate when bonds sell
A. above face value.
B. at maturity value.
C. below face value.
D. at face value.

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Bonds usually sell at a discount when
A. investors are willing to invest in the bonds only at rates that are higher than the stated interest rate.
B. investors are willing to invest in the bonds at rates that are lower than the stated interest rate
C. investors are willing to invest in the bonds at the stated interest rate.
D. An unfavorable tax event will impact the buyer.

Chapter 9 Q&A

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