Question

1. All other things being equal, the interest on secured debt is higher than that on unsecured debt? TRUE OR FALSE

2. the periodic adjustment to the carrying value of longterm debt after each interest payment date is a function of?

a. the face rate

b. the market rate

c. both the face rate and the market rate

d. neither the face rate nor the market rate

3.A noninterest-bearing note is always issued at:

a. its face value

b. a discount

c. A premium

d. Not determinable without additional information

4. From an accounting perspective, one of the advantage of a non-interest bearing note is that there is no interest expense that must be reported on the income statement? TRUE OR FALSE

5. When considering how to finance the acquisition of an asset, which of the following statements is true?

a. the company should never borrow money unless there is no cash to fund the asset acquisition

b. the amount borrowed should be larger than the cost of the assets acquired

c. The cash flows generated by the assets should ordinarly dictate the type of note (e.g noninterest bearing installement, etc) the company uses to finance the asset

d. The cash flow required by the type of not used should ordinarily dictate the type of asset acquired

6. When convertible bonds are exchanged for common stock, which of the following is true? SELECT ALL THAT APPLY

a. the debt to equity ratio will go down

b. interest expense will decrease

c. the times interest earned ratio will go up

d. the bonds will not have to be repaid at the maturity date.

Answer 1

Question 1:

False

Interest on secured debt will be comparatively lower than interest on unsecured debt as the secured debt giver was not exposed to much risk as the other. The higher risk for the unsecured debt holder is an reward for his risk.

Question 2:

option B. Market rate

The adjustment of carrying value of the long term debt is due to difference in the market interest rate and our coupon rate on the debt.

Question 3:

option c. Discount

A non interest bearing note will be issued at a discount because it will mature at there face value.

The difference between the face value and discounted issue price is nothing but the reward for the note holder

Question 4:

​​​​​​False.

​​​​​​The interest will be recognized but in different way like amortization of discount value in accounts.