Commerce MCQs
Topic Notes: Commerce
MCQs and preparation resources for competitive exams, covering important concepts, past papers, and detailed explanations.
Plato
- Biography: Ancient Greek philosopher (427–347 BCE), student of Socrates and teacher of Aristotle, founder of the Academy in Athens.
- Important Ideas:
- Theory of Forms
- Philosopher-King
- Ideal State
71
What type of payment is typically associated with debentures?
Answer:
Interest
Debentures are debt instruments issued by corporations or governments to raise capital. Unlike equity shares which pay dividends, debentures represent a loan provided by investors to the issuer. Consequently, the issuer is contractually obligated to pay a fixed rate of interest to the debenture holders at regular intervals, regardless of the company's profit performance.
72
A company issues Rs. 100,000 in 7.5% debentures at a 5% discount, repayable after 10 years at a 5% premium. What is the annual amount of loss on the issue to be written off?
Answer:
Rs. 1,000
The total loss on issue consists of the discount on issue (5% of 100,000 = 5,000) plus the premium payable on redemption (5% of 100,000 = 5,000), totaling Rs. 10,000. Spreading this loss over the 10-year tenure of the debentures results in an annual write-off of Rs. 1,000 (10,000 / 10 years).
73
What is the alternative term for the stated interest rate on a bond?
Answer:
stated interest rate
The coupon rate, also known as the nominal or stated interest rate, is the fixed percentage of the bond's face value that the issuer agrees to pay as interest to the bondholder annually or semi-annually. This rate is determined at the time of issuance and remains constant throughout the life of the bond, regardless of fluctuations in market interest rates.
74
What are financial instruments with detachable warrants that are redeemable after a specific period called?
Answer:
Secured Premium Notes
Secured Premium Notes (SPNs) are debt instruments that often come with detachable warrants. These warrants grant the holder the right to purchase equity shares at a predetermined price. They are typically secured by the company's assets and are redeemed at a premium after a set duration.
75
How is the discount allowed on the issue of debentures classified in accounting?
Answer:
capital loss
Discount on the issue of debentures is considered a capital loss because it relates to the raising of long-term capital rather than the day-to-day operations of the business. While it is often amortized over the life of the debentures, the initial discount represents a cost of obtaining capital, which is fundamentally a capital-related transaction.
76
What is the term for a debenture that is transferable by delivery without requiring formal registration in the company's records?
Answer:
Bearer debenture
A bearer debenture is a type of debt instrument where the company does not maintain a register of debenture holders. The interest and principal are paid to whoever holds the physical certificate, making it easily transferable by simple delivery without the need for a transfer deed.
77
Which financial instruments are characterized by the inclusion of detachable warrants and a specified redemption period?
Answer:
Secured Premium Notes
Secured Premium Notes (SPNs) are debt instruments issued with detachable warrants. These warrants grant the holder the right to purchase equity shares of the issuing company at a predetermined price after a specified period, combining debt features with equity participation options.
78
What is the term for the additional payment made if a bond's call provision is exercised during the first year of its issuance?
Answer:
call provision
A call provision grants the issuer the right to redeem the bond before its scheduled maturity date. If the issuer exercises this right, they often pay a 'call premium' to the bondholder as compensation for the early redemption. This provision is typically included in the bond indenture to allow the company to refinance debt if market interest rates drop significantly.
79
How are bonds categorized when they are issued by foreign governments or corporations within a domestic market?
Answer:
foreign bonds
Foreign bonds are debt securities issued by a foreign entity in a domestic market and denominated in the currency of that domestic market. These instruments allow issuers to tap into foreign capital markets to raise funds, while investors gain exposure to international entities without needing to manage currency exchange risks directly in their own portfolios.
80
On what value is interest on debentures typically calculated?
Answer:
nominal/face value
Interest on debentures is a fixed obligation based on the face value (nominal value) of the instrument. Regardless of the market price or the purchase price paid by the investor, the issuer pays interest based on the par value stated on the debenture certificate, ensuring a consistent return for the holder.