Consider the following statements: Statement 1. When amortizing a bond discount, the bond's amortized cost decreases each period as the inte expense increases. Statement 2. When amortizing a bond premium, the bond's amortized cost increases each period as the inte expense increases. Select one: a. Neither of the statements is correct b. Only statement 2 is correct C. Both statements are correct d. Only statement 1 is correct
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- If the market rate of interest is greater than the contractual rate of interest, bonds will sell a. at a discount b. only after the stated rate of interest is increased c. at a premium d. at face valueWhich of the follwing statement is correct. As the credit risk of a bond increases: A. The YTM falls and price of the bond falls B. The YTM increases and price of the bond falls C. The YTM falls and price of the bond rises D. The YTM increases and price of the bond risesWhen a bond sells at a discount, the carrying value ________ after each amortization entry. A. increases B. decreases C. stays the same D. cannot be determined
- Which of the following statements is CORRECT? a. A bond is likely to be called if it sells at a discount below par. b. A bond is likely to be called if it sells at a premium above par c. A bond is likely to be called if its market price is equal to its par value. d. A bond is likely to be called if its market price is below its par value.4. When the market rate of interest is greater than the contract rate ofinterest, the bonds should sell at a. a premium b. par value c. a discount d. par valueThe return payable on Bond is called Select one: a. Commission b. Discount c. None of the options d. Interest e. Brokerage
- Bond 1 and Bond 2 are identical, except that Bond 2 has credit enhancement. Issuer of Bond 2 has higher credit risk compared to issuer of Bond 1. Which of the following statements is true? A. Credit risk for Bond 2 will be lower than that for Bond 1 B. Credit risk for Bond 2 will be higher than that for Bond 1 OC. Need more information to answer the questionB. TRUE OR FALSE. Use the separate answer sheet. 1. If the effective (market) interest rate is less than the coupon (stated) interest rate on the date that bonds are sold, the bond price will be less than the face value of the bonds. 2. The effective interest rate method of amortizing bond discount or premium can only be used when it doesn't materially differ from the straight-line method, as the straight-line method is considered GAAP. 3. 4. 5. 6. 7. 678 8. 9. 10. A stock dividend converts earned capital into contributed capital, but total stockholder equity doesn't change. A bond's carrying value at maturity should equal its par or face value. Most corporations set a par value for their common shares at a fairly large number, such as $100 per share, in order to minimize legal liability on the part of shareholders. Treasury shares are considered to be issued and outstanding. Paid-in capital in excess of par value will be created when a 50% stock dividend is declared. All corporate…Which of the following statements is false? A. Other things being equal, an increase in a bond’s maturity will increase its interest rate risk. B. Other things being equal, an increase in the coupon rate of a bond will decrease its interest rate risk. C. Other things being equal, an increase in a bond’s YTM will decrease its interest rate risk. D. Effective duration is calculated as Macaulay duration divided by one plus the bond’s yield to maturity.
- Refer to Chapter 10, page 567: Stated rate of interest versus the market rate of interest Required Indicate whether a bond will sell at a premium (P), discount (D), or face value (F) for each of the following conditions: ____ The stated rate of interest is higher than the market rate. ____ The market rate of interest is equal to the stated rate. ____ The market rate of interest is less than the stated rate. ____ The stated rate of interest is less than the market rate. ____ The market rate of interest is higher than the stated rateWhen bonds are retired at maturity, ________. A. the carrying value always equals the face value B. the carrying value equals the face value plus the unamortized premium or less the unamortized discount C. the bondholders are paid the face value plus the unamortized premium or less the unamortized discount D. the entry to retire the bonds may include a gain or loss on retirement of bondsWhich of the following statements is/are most CORRECT? O 11 A yield curve depicts the relationship between bond's 'time to maturity and its yield to maturity. 2) A premium bond's price will decline over time if the required return remains unchanged. 3) A discount bond's price will decline over time if the required return remains unchanged. 4) Both a and b are correct.