Multiple Choice
When a bond is sold for more than its face (par) value, what is this situation called?
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11. Long Term Liabilities
Introduction to Bonds and Bond Characteristics
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Which one of the following is a true statement regarding corporate bonds?
A
Corporate bonds typically pay periodic interest to bondholders, known as coupon payments.
B
Corporate bonds do not have a maturity date and are perpetual.
C
Corporate bonds are only issued by government entities.
D
Interest earned on corporate bonds is always tax-free for investors.
Verified step by step guidance1
Understand the nature of corporate bonds: Corporate bonds are debt instruments issued by corporations to raise capital. They typically have a fixed maturity date and pay periodic interest, known as coupon payments, to bondholders.
Clarify the concept of coupon payments: Coupon payments are the periodic interest payments made to bondholders, usually semi-annually or annually, based on the bond's stated interest rate (coupon rate).
Evaluate the statement about maturity dates: Corporate bonds are not perpetual; they have a specific maturity date when the principal amount is repaid to the bondholder.
Analyze the issuer of corporate bonds: Corporate bonds are issued by corporations, not government entities. Government entities issue their own bonds, such as treasury bonds or municipal bonds.
Examine the tax implications: Interest earned on corporate bonds is generally taxable for investors, unlike certain government-issued bonds (e.g., municipal bonds) which may offer tax-free interest under specific conditions.
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