Question

Seattle Industries recently offered bonds for sale to the public. They offered an interest rate on the bonds of 5% to investors for the twenty-year life of the bonds. Seattle must remember that:

A) bonds represent an ownership role in the company.

B) bond interest must be paid regularly.

C) bond interest is paid immediately after dividends.

D) bond principal must be paid on owner demand.

Answer 1

Issue of bond is liability for company which needs to be repaid on maturity. Bonds does not provide any ownership role in the company as bondholders are lenders and not shareholders for company.

Thus, statement (A) is incorrect

Bond interest are not paid after dividend. Bond interest has priority over dividend payment and is paid as per the interest rate.

Thus, statement (C) is incorrect

Bond principal are not demand liabilities and are payable on due date of bond.

Thus, statement (D) is incorrect

The important thing on bonds are that interest obligation on bonds are to be paid regularly and on time based on the frequency and date fixed to interest on bond. Company should not miss any interest payment and pay them regularly as they become due.

Thus, statement (B) is correct