A company obtains a $1,000,000 variable rate loan on January 1, 2021, at a 2.1% interest rate. The loan is renewable every 3 months, and the interest rate is reset at each renewal. The company hedges against rising interest rates by taking a short futures position in $1,000,000 of 3-month Treasury bills at 99. There is no margin deposit, and the hedge qualifies as a fair value hedge of a firm liability commitment. At the end of 3 months, the Treasury bills sell for 98.2 and the loan renews at 2.9%. The company closes the futures contract and renews the loan. All income effects of the loan and the futures are reported in interest expense. At what amount will interest expense be reported for the new loan? Select one: A. $29,000 B. $ 9,250 C. $ 7,250 D. $ 5,250 Please Show Work
A company obtains a $1,000,000 variable rate loan on January 1, 2021, at a 2.1% interest rate. The loan is renewable every 3 months, and the interest rate is reset at each renewal. The company hedges against rising interest rates by taking a short futures position in $1,000,000 of 3-month Treasury bills at 99. There is no margin deposit, and the hedge qualifies as a fair value hedge of a firm liability commitment. At the end of 3 months, the Treasury bills sell for 98.2 and the loan renews at 2.9%. The company closes the futures contract and renews the loan. All income effects of the loan and the futures are reported in interest expense. At what amount will interest expense be reported for the new loan? Select one: A. $29,000 B. $ 9,250 C. $ 7,250 D. $ 5,250 Please Show Work
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Debenture Valuation
A debenture is a private and long-term debt instrument issued by financial, non-financial institutions, governments, or corporations. A debenture is classified as a type of bond, where the instrument carries a fixed rate of interest, commonly known as the ‘coupon rate.’ Debentures are documented in an indenture, clearly specifying the type of debenture, the rate and method of interest computation, and maturity date.
Note Valuation
It is the process to determine the value or worth of an asset, liability, debt of the company. It can be determined by many processes or techniques. Many factors can impact the valuation of an asset, liability, or the company, like:
Question
Transcribed Image Text:A company obtains a $1,000,000 variable rate
loan on January 1, 2021, at a 2.1% interest
rate. The loan is renewable every 3 months,
and the interest rate is reset at each renewal.
The company hedges against rising interest
rates by taking a short futures position in
$1,000,000 of 3-month Treasury bills at 99.
There is no margin deposit, and the hedge
qualifies as a fair value hedge of a firm liability
commitment. At the end of 3 months, the
Treasury bills sell for 98.2 and the loan renews
at 2.9%. The company closes the futures
contract and renews the loan. All income
effects of the loan and the futures are
reported in interest expense.
At what amount will interest expense be
reported for the new loan?
Select one:
A. $29,000
B. $ 9,250
C. $ 7,250
D. $ 5,250
Please Show Work
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