Multiple choice questions on  transactions

1.  Lakeside Realty used supplies costing $50. This transaction:

a.         decreased supplies and decreased cash

b.        increased inventory and decreased cash

c.         increased supplies expense and decreased cash

d.        increased supplies expense and decreased supplies

2.  Cost of goods sold is an:

a.         asset

b.        liability

c.         revenue

d.        expense

3. An expense is recognized when:

a.         a business buys inventory

b.        a business buys supplies

c.         a business pays rent

d.        a business repays a loan

4.  Accounts Receivable decreases when:

a.         goods are sold on credit

b.        goods are purchased on credit

c.         customers pay for goods previously purchased on credit

d.        a payment is made for goods purchased on credit

5.  Accounts payable increases when:

a.         goods are sold on credit

b.        goods are purchased on credit

c.         customers pay for goods previously purchased on credit

d.        a payment is made for goods purchased on credit

6.  Which of the following is an example of a fixed asset?

a.         building

b.        supplies

c.         inventory

d.        cash

7.  Three-year treasury securities yield 5%, 5-year treasury securities yield 6%, and 8-year treasury securities yield 7%. If the expectations theory is correct, what is the expected yield on 5-year Treasury securities three years from now?

a.         5.09%

b.        7.00%

c.         6.71%

d.        8.22%

e.         6.03%

8.   Walker Corporation is planning to issue new 20-year bonds. Initially, the plan was to make the bond non-callable. If the bond were made callable after 5 years with a 5% call premium, how would this affect the bond's required rate of return?

a.         It is impossible to say without more information.

b.        Because of the call premium, the required rate of return would decline.

c.         There is no reason to expect a change in the required rate of return.

d.        The required rate of return would decline because the bond would then be less risky to a bondholder.

e.         The required rate of return would increase because the bond would then be more risky to a bondholder.

9.  Which of the following statements is INCORRECT about bonds? In all of the statements, assume other things are held constant.

a.         Price sensitivity, that is, the change in price due to a given change in the required rate of return, increases as a bond's maturity increases.

b.        For a given bond of any maturity, a given percentage point increase in the interest rate (rd) causes a larger dollar capital loss than the capital gain stemming from an identical decrease in the interest rate.

c.         For any given maturity, a given percentage point increase in the interest rate causes a smaller dollar capital loss than the capital gain stemming from an identical decrease in the interest rate.

d.        From a borrower's point of view, interest paid on bonds is tax-deductible.

e.         A 20-year zero coupon bond has less reinvestment rate risk than a 20-year coupon bond.

10.  A 12-year, $1,000 face value bond pays a 9% annual coupon and has a yield to maturity of 7.5%. The bond can first be called four years from now, at a call price of $1,050. What is the bond's yield to call?

a.         6.73%

b.        7.10%

c.         7.50%

d.        11.86%

e.         13.45%

11.  Matteo Toys has 9% annual coupon, $1,000 face value bonds outstanding that mature in 10 years. However, the bonds can be called before maturity at a call price of $1,050. The bonds have a yield to call of 6.5% and a yield to maturity of 7.4%. How long until these bonds may first be called?

a.         2.21 years

b.        3.16 years

c.         3.68 years

d.        5.37 years

e.         6.32 years