Chapter 9 - 12 Review

A bond issue with a face amount of $495,000 bears interest at the rate of 10%. The current market rate of interest is also 10%. These bonds will sell at a price that is:

• Equal to $495,000

• The answer cannot be determined from the information provided.

• Less than $495,000

• More than $495,000

Which of the following is not a primary source of corporate debt financing?

• Leases

• Stockholders

• Bonds

• Notes

Answer explanation

Stockholders = the primary source of corporate equity financing.

A bond issue with a face amount of $495,000 bears interest at the rate of 7%. The current market rate of interest is 8%. These bonds will sell at a price that is:

• More than $495,000

• The answer cannot be determined from the information provided

• Equal to $495,000

• Less than $495,000

A bond issue with a face amount of $500,000 bears interest at the rate of 7%. The current market rate of interest is 6%. These bonds will sell at a price that is:

• The answer cannot be determined from the information provided

• Less than $500,000

• Equal to $500,000

• More than $500,00

For a bond issue that sells for more than the bond face amount, the stated interest rate is:

• The actual yield rate

• The prime rate

• More than the market rate

• Less than the market rate

For a bond issue that sells for less than the bond face amount, the stated interest rate is:

• Less than the market rate

• More than the market rate

• The prime rate

• The actual yield rate

Seaside Industries issues a bond with a stated interest rate of 10%, face amount of $50,000, and due in 5 years. Interest payments are made semiannually. The market rate for this type of bond is 12%. What is the issue price of the bond (rounded to nearest whole dollar)? (Use PV of $1 and PVA of $1)

• $83,920

• $46,320

• $53,605

• $50,000

Answer explanation

$50,000 x 0.55839 = $27,920

$2,500 x 7.36009 = $18,400

$27,920 + $18,400 =$46,320

Interest Expense: $50,000 x 10% x 1/2 = $2,500

PV of $1: i = 12% / 2 semiannual periods = 6%

n = 5 years x 2 period each year = 10 periods

PVA of $1: 12% / 2 semiannual periods = 6%

n = 5 years x 2 period each year = 10 periods

A corporation is an entity that is (1) legally separate from its owners and (2) not required to pay its own income taxes.

• True

• False

Answer explanation

A corporation is an entity that is legally separate from its owners and even pays its own income taxes.

Limited liability means that even in the event of bankruptcy, stockholders in a corporation can lose no more than the amount they invested in the company.

• True

• False

Owners in a sole proprietorship or a partnership can be held personally liable for debts the company has incurred, over and beyond the investment they have made.

• True

• False