8. More on types of bonds You can distinguish the various types of bonds by their terms of contract, pledge of collateral, and so on. Identify the type of bond based on each description given in the table that follows: Description Type of Bond These bonds are collateralized securities with first claims in the event of bankruptcy. These bonds are traded in the bond markets based on investors' belief that the issuer will not default on the repayment. These bonds have no collateral and usually offer higher yields. These bonds have a claim on assets only after senior debt has been paid in full. Based on your understanding of bond ratings and bond-rating criteria, which of the following statements is true? O During an economic recession and in a pessimistic environment, the yield spread between US government bonds and corporate bonds could be higher than during good economic times. O During a period of economic growth and in an optimistic environment, the yield spread between US government bonds and corporate bonds could be higher than during an economic recession and a pessimistic environment.

8. More on types of bonds You can distinguish the various types of bonds by their terms of contract, pledge of collateral, and so on. Identify the type of bond based on each description given in the table that follows: Description Type of Bond These bonds are collateralized securities with first claims in the event of bankruptcy. These bonds are traded in the bond markets based on investors' belief that the issuer will not default on the repayment. These bonds have no collateral and usually offer higher yields. These bonds have a claim on assets only after senior debt has been paid in full. Based on your understanding of bond ratings and bond-rating criteria, which of the following statements is true? O During an economic recession and in a pessimistic environment, the yield spread between US government bonds and corporate bonds could be higher than during good economic times. O During a period of economic growth and in an optimistic environment, the yield spread between US government bonds and corporate bonds could be higher than during an economic recession and a pessimistic environment.

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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A bond that has only one payment, which occurs at maturity, defines which one of these types of bonds?
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To be effective issuing and investing in bonds, knowledge of their terminology, characteristics, and features is essential. For example: • A bond’s refers to the interest payment or payments paid by a bond. • A bond issuer is said to be in if it does not pay the interest or the principal in accordance with the terms of the indenture agreement or if it violates one or more of the issue’s restrictive covenants. • The contract that describes the terms of a borrowing arrangement between a firm that sells a bond issue and the investors who purchase the bonds is called . • A bond’s gives the issuer the right to call, or redeem, a bond at specific times and under specific conditions. Suppose you read an article about the Golden Gate Bridge and Highway District bonds. It includes the following information: Bridge Bonds Series A Dated 7-15-2005 4.375% Due 7-15-2055 @100.00 What is the issuing date of this bond? 7-15-2005 7-15-2055…
Default risk on bonds can be evaluated by using:A. financial analysisB. bond ratingsC. estimates of potential losses on bondsD. a and b
Identify each statement as true or false. If false, indicate how to correct the statement. (And you have forgotten to answer the right ans of false in the previous question)
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 rate
Can I use the yield to maturity (YTM) on a bond issued by the company as the cost of debt? A Yes, you can use the YTM B No, you cannot use the YTM C Only if the bond is liquid and has not special feature embedded in it D There is not enough information to answer this problem
How are the bonds issued, what is the appropriate journal entry? Provide example for issuing bonds. How do we determine the present value of a bond when market rate differs from its contract rate? How do we record the interest payment (provide examples for both premium and discount amortization), using the effective interest method? What is the difference between the effective interest method and the straight line method when amortizing either a discount or a premium? Cite and give credit to the author that you are citing.
How do you calculate the price of a bond? It is: The sum of the present value of the face amount and the value of credit default swaps The sum of the future value of annuity of interest and the fair value of its inventory The sum of the present value of annuity of interest and the face amount of the bond The sum of the current value of the issuing corporation of accounts receivables None of the above.
Which of the following is not an effect of a call provision? A. Issuer can refund the bond issue if rates decline. B. Requires the issuer to pay off the loan over its life rather than all at maturity. C. Bond investors require higher yields on callable bonds D. Upon calling bonds the issuer must pay call premium to bond holder E. All of the above are effects of a call provision
8. Which is least likely true about bonds? a. It is a financial security. b. The issuer has the obligation to make specified payments. c. Bondholders have the right to make decisions on the firm's affairs. d. Bondholders have the right to claim interest payments. е. с &d f. All of the above g. None of the above