Reading 39: Analysis of Financing Liabilities - LOS b ～ Q

答案和详解如下：

16.A $1,000 bond is issued with an 8.0 percent semiannual coupon rate and 5 years to maturity when market interest rates are 10 percent. What is the initial liability?

A)   855.

B)   835.

C)   1023.

D)   923.

The correct answer was D)

FV=1000; PMT = 80/2; N=5*2; I/Y=10/2; solve for PV = 923.

17.Which of the following statements is FALSE? When a bond is issued at a discount:

A)   cash flows from financing will be increased by the par value of the bond issue.

B)   the initial liability listed in the balance sheet will be less than the par value of the bond.

C)   the interest expense will be equal to the coupon payment plus the amortization of the discount.

D)   the interest expense will increase over time.

The correct answer was

Upon issuance, cash flow from financing will be increased by the amount of the proceeds.

18.The real estate group of a manufacturing company needs to finance a large construction project. The CEO wants to use zero coupon bonds, because “they are easy to understand.” The Executive Vice President (EVP) recommends a bond issued with a coupon rate greater than the current market rate of interest. A consultant recommends a bond issued at par. Regarding the financial and cash flow impact, which of the following statements is FALSE? All else equal, if the company follows the:

A)   EVP's suggestion, interest expense will decrease over time.

B)   EVP's suggestion, both the cash flow from financing and cash flow from operations will be understated compared to that of the par value bond recommended by the consultant.

C)   CEO's recommendation, the company will still recognize interest expense.

D)   CEO's recommendation, there will be no impact on cash flow from operations.

The correct answer was B)

If the company issues a premium bond (defined as coupon rate greater than the current market rate), the cash flow from financing will be overstated and cash flow from operations will be understated compared to the par value bond recommended by the consultant.

The other statements are true. With the premium bond, interest expense decreases over time because the carrying value of the bond decreases as the unamortized premium decreases by the difference between the coupon payment and the interest expense (market rate times carrying value.) All cash flows for a zero-coupon bond are financing cash flows, but the bond still has interest expense (used to amortize the unamortized discount account).

19.Over time, the reported amount of the annual interest expense on a long-term bond issued at a discount will:

A)   remain constant.

B)   increase.

C)   initially increase and then decrease.

D)   decrease.

The correct answer was B)

A portion of the discount must be amortized to the interest expense each year. The amortized amount is debited to interest expense and credited to debt. So debt goes up. The interest expense is debt times the effective interest rate. Thus, interest expense will increase over time.

20.Assuming all else equal, if the coupon rate offered on a bond is less than the corresponding market rate of interest, the bond will be issued at:

A)   par.

B)   a premium.

C)   Cannot be determined from the information provided.

D)   a discount.

The correct answer was D)

If the coupon rate is less than the market rate, the bond must be sold at a discount so the effective rate on the bond equals the market rate.