LNP is a company with a liability of $110million due in 10 years. The company's onlyasset is $70 million held in cash. Throughoutthis question, assume the term structure ofinterest rates is flat at 5%.a) Determine the present value of thecompany's liability.b) Without doing any calculations, brieflyexplain why holding all its assets in cash isproblematic for LNP from an interest rate riskmanagement perspective.

Determine the present value of the company’s liability. LNP Present Value of Liability = Debt…

a) Determine the present value of the company's liability. b) Without doing any calculations, briefly explain why holding all its assets in cash is problematic for LNP from an interest rate risk management perspective.

a) Determine the present value of the company's liability. b) Without doing any calculations, briefly explain why holding all its assets in cash is problematic for LNP from an interest rate risk management perspective.

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

See similar textbooks

Similar questions

Minimizing liquidity is an excellent way to meet a company's short-term financial obligations. 1) False 2) True
Which of the following statements is correct? A. Investors appreciate illiquid assets in their portfolios as they can easily sell them off to cover margin calls. B. Liquid assets can quickly be converted into cash without changing prices too much. O C. Corporate bonds are among the most liquid financial assets as they trade at a very high frequency. D. Liquid assets tend to be cheaper as investors are not willing to pay for their liquidity benefits.
Reinvestment risk occurs when a financial institution holds longer-term assets relative to liabilities and faces uncertainty about the interest rate at which it can reinvest funds borrowed over a longer period. Select one: True False
Which of the following statements is/are true? Multiple statements may be true A bank borrowing from the central bank signals confidence to other market participants The risk of fire sale is decreasing in the underlying item's illiquidity Liquidity risk can be addressed using off-balance sheet items Liquidity risk can originate from off-balance sheet items
True (t) or False (f) ______ Short-term, highly liquid investments may be included with cash on the balance sheet.
Which of the following circumstances would result in an increase in cash from operations but not an increase in net income? Select one: a. None of the other choices is correct b. The failure to take advantage of a purchase discount offered by the supplier c. The sale of equipment for an amount greater than its book value d. The reissuance of treasury stock for an amount greater than its cost e. The issuance of bonds at a premium
What are some advantages of matching the maturities of claims against assets with the lives of theassets financed by those claims? Is it feasible for afirm to match perfectly the maturities of all assetsand claims against assets? Why might a firm deliberately mismatch some asset and claim maturities?
Question1. Arbitrage is limited because the wealth of arbitrageurs is limited. Discuss this statement in the context of those who are managing their own money and those who are managing other people’s money. Question 2. Differentiate the following terms and concepts: a,Primacy and recency effects b. Salience and availability c. Fast-and-frugal heuristics and bias-generating heuristics d. Autonomic and cognitive heuristics Please include refernces and in text citations.
Substantial doubt exists regarding a client's ability to continue. The client must present its plans to mitigate the effects of the events and conditions. Which item is NOT an acceptable plan? a. Restructure debt to delay due date of Bonds Payable. b. Sell assets used in product production for cash. c. Issue Common Stock at market value. d. Decrease dividend requirements. e. Obtain cash by issuing notes.
Consider the following statement: "The estimation of the Free Cash Flow to the Firm (FCF) considers investment decisions but ignores financing decisions." Is this statement true or false? Explain your answer.
1.What are the benefits and costs to an FI of holding large amounts of liquid assets? Why are Treasury securities considered good examples of liquid assets? 2. What are the primary methods that insurance companies can use to reduce their exposure to liquidity risk?
describe and compare alternative ways to estimate the probability of company defaulting on its debt obligations. Explain the difference between real-world and risk-neutral estimates