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Exam 14: Bonds and Long-Term Notes

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Question 81

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The debt to equity ratio indicates:

A) The margin of safety provided to creditors.
B) The extent of "trading on the equity" or financial leverage.
C) Profitability without regard to how resources are financed.
D) The effectiveness of employing resources provided by owners.

E) A) and B)
F) All of the above

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Question 82

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Markel Inc.has bonds outstanding during a year in which the general (risk-free) rate of interest has not changed.Markel elected the fair value option for the bonds upon issuance.What will the company report for the bonds in its income statement for the year?

A) Interest expense and a gain.
B) Interest expense and a loss.
C) A gain and no interest expense.
D) Interest expense and no gain or loss.

E) All of the above
F) C) and D)

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Question 83

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Use the following to answer questions Lopez Plastics Co.(LPC) issued callable bonds on January 1,2016.LPC's accountant has projected the following amortization schedule from issuance until maturity: -What is the annual effective interest rate on the bonds?

How are bonds and notes the same? How do they differ?

The rate of return on shareholders' equity indicates:

What is the effective annual rate of interest on the bonds?

In its 2016 annual report to shareholders,Bare Sturns Group Inc.disclosed the following: On October 28,2016,the Company issued $475,000,000 aggregate principal amount of 9-1/4% Senior Notes Due 2021 ("Senior Notes")and $618,670,000 aggregate principal amount at maturity of 10-1/4% Senior Discount Notes Due 2021 ("Senior Discount Notes" and collectively the "Notes")in a transaction not registered under the Securities Act in reliance upon an exemption from the registration requirements of the Securities Act.Gross proceeds from the offering amounted to $850,000,000.The discount on the Senior Discount Notes is being accreted under the effective interest method. Explain the last sentence of the disclosure to clarify what accounting was necessary and why.