ASU ACC231 Exam3 Practice

ASU ACC231 EXAM3

PRACTICE

Question 1: When a bond is issued at a premium, what is the e�ect on the carrying value of the bond over time?

Choices:

1) It increases over the life of the bond.2) It decreases and approaches the face value over the life of the bond.3) It remains constant over the life of the bond.4) It �uctuates based on the market interest rate.Correct Answer: It decreases and approaches the face value over the life of the bond.Explanation: When a bond is issued at a premium, the premium is amortized over the life of the bond, which reduces the carrying value until it reaches the face value at maturity.Page 1

Question 2: A company issues $100,%, 10-year bonds when the market

interest rate is 10%. The bonds will issue at:

Choices:

1) Face value 2) A premium 3) A discount 4) Stated value

Correct Answer: A discount

Explanation: Because the stated interest rate (8%) is lower than the market rate (10%), the bonds are less attractive and must be sold at a discount to yield the market rate.

Question 3: Which of the following describes the market interest rate?

Choices:

1) The rate printed on the bond certi�cate.2) The rate used to determine the cash interest payments.3) The e�ective rate that investors demand for earning a return on the bond.4) The rate established by the Securities and Exchange Commission.Correct Answer: The e�ective rate that investors demand for earning a return on the bond.Explanation: The market interest rate (or e�ective yield) is the true rate of return demanded by investors based on the risk and market conditions at the time of issuance.Page 2

Question 4: If a $10,000, 5% bond is issued at 102, what is the cash received upon issuance?

Choices:

1) $9,800

2) $10,000

3) $10,200

4) $10,500

Correct Answer: $10,200

Explanation: Issuing at 102 means the bond is sold at 102% of its face value. $10,000 * 1.02 =

$10,200.

Question 5: How is the interest expense calculated using the e�ective-interest amortization method?

Choices:

1) Face value of the bond multiplied by the stated interest rate.2) Carrying value of the bond multiplied by the market interest rate at issuance.3) Face value of the bond multiplied by the market interest rate.4) Carrying value of the bond multiplied by the stated interest rate.Correct Answer: Carrying value of the bond multiplied by the market interest rate at issuance.Explanation: Under the e�ective-interest method, interest expense equals the carrying value of the bonds at the beginning of the period multiplied by the market rate of interest.Page 3