Multiple Choice
On January 1, Providence, Inc. issues \$1,000,000 of 10% 5-year bonds at par value. What amount of cash does Providence, Inc. receive from this bond issuance?
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11. Long Term Liabilities
Introduction to Bonds and Bond Characteristics
Multiple Choice
A bond’s ______ is generally \$1,000 and represents the amount borrowed from the bond’s first purchaser.
A
coupon rate
B
maturity date
C
face value (par value)
D
market value
Verified step by step guidance1
Understand the concept of a bond: A bond is a fixed-income security that represents a loan made by an investor to a borrower, typically corporate or governmental.
Identify the key terms in the problem: The question is asking about the term that represents the amount borrowed from the bond’s first purchaser, which is generally \$1,000.
Clarify the term 'face value' (also known as par value): The face value of a bond is the nominal value or dollar amount stated on the bond certificate. It is the amount the issuer agrees to repay the bondholder at maturity.
Differentiate between the other terms: The 'coupon rate' refers to the interest rate the bond pays annually, the 'maturity date' is when the bond's principal is repaid, and the 'market value' is the current trading price of the bond, which can fluctuate.
Conclude that the correct answer is 'face value' because it represents the amount borrowed from the bond’s first purchaser, typically \$1,000.
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