Question

1. From the standpoint of the issuing company, a disadvantage of using bonds as a means of long-term financing is that A. bond interest is deductible for tax purposes. B. interest must be paid on a periodic basis regardless of earnings. C. income to stockholders may increase as a result of trading on the equity D. the bondholders do not have voting rights. 2. Bonds that mature at a single specified future date are called A. coupon bonds. B. term bonds. C. serial bonds. D. debentures. E. none of the above. 3. Bonds that may be exchanged for common stock at the option of the bondholders are called A. options. B. stock bonds. C. convertible bonds. D. callable bonds. 4. Investors who receive checks in their names for interest paid on bonds must hold A. registered bonds. B. coupon bonds. C. bearer bonds. D. direct bonds. 5. If the market interest rate is greater than the contractual interest rate, bonds will sell A. at a premium. B. at face value. C. at a discount. D. only after the stated interest rate is increased.

Answer 1

1. B. Interest must be paid on periodic basis regardless of earnings.

Explanation: The Bonds issued by the company has a debt service obligation, whereby, the company is bound to pay the interest at periodic intervals to the Bondholder regardless of profit / loss of the company.

2. B. Term Bonds.

Explanation: The Term Bonds are the bonds that are issued for a specified period of time and hence bears a specific maturity date on which the bonds become payable.

3. C. Convertible Bonds.

Explanation: Convertible Bonds are the Bonds that have the option of getting converted into common equity of the issuing company. Such bonds are issued by the company majorly for two reasons as below;
i. Seeing the option of getting converted into equity, the bondholder demand lower interest rate, hence, it is beneficial for the company.

ii. Since the Bonds can be converted into equity, the money received on issuing of convertible bonds stay for longer duration with the company and is not payable immediately.

4. A. Registered Bonds.

Explanation: Registered Bonds are the Bonds wherein the details of the Bondholders are available with the issuing company, hence, the checks are issued in name of the Bondholder at periodic intervals.

5. C. At a Discount.

Explanation: When the market rate is higher than the contracted rate, it means that the issuer is issuing the bonds at rate which is lower than the market rate and hence, the bonds are issued at discount.