A nation has zero public debt in year 1. It then experiences the following budget situations: • Year 2: Budget deficit of $75 billion Year 3: Budget deficit of $45 billion Year 4: Budget surplus of $20 billion Year 5: Budget deficit of $15 billion a. Calculate the absolute size of its public debt in year 5. b. If its real GDP in year 5 is $230 billion, what is the country's public debt as a percentage of real GDP?
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- Accounting questionHow much debt should be incurred/settled to satisfy the banks condition?Suppose that the assets of a bank consist of $200 million of retail loans (not mortgages). The PD is 1% and the LGD is 70%. What is the risk-weighted assets under the Basel II IRB approach? What are the Tier 1 and Tier 2 capital requirements?
- 1. An overview of a firm's cost of debt The is the interest rate that a firm pays on any new debt financing. Cold Goose Metal Works (CGMW) can borrow funds at an interest rate of 7.30% for a period of five years. Its marginal federal-plus-state tax rate is 35%. CGMW's after-tax cost of debt is (rounded to two decimal places). At the present time, Cold Goose Metal Works (CGMW) has a series of twenty-year noncallable bonds with a face value of $1,000 that are outstanding. These bonds have a current market price of $1,181.96 per bond, carry a coupon rate of 13%, and distribute annual coupon payments. The company incurs a federal-plus-state tax rate of 35%. If CGMW wants to issue new debt, what would be a reasonable estimate for its after-tax cost of debt (rounded to two decimal places)? O8.04% O 8.39% O 5.59% O 6.99%2. An overview of a firm's cost of debt To calculate the after-tax cost of debt, multiply the before-tax cost of debt by Perpetualcold Refrigeration Company (PRC) can borrow funds at an interest rate of 12.50% for a period of four years. Its marginal federal-plus-state tax rate is 25%. PRC's after-tax cost of debt is (rounded to two decimal places). At the present time, Perpetualcold Refrigeration Company (PRC) has 10-year noncallable bonds with a face value of $1,000 that are outstanding. These bonds have a current market price of $1,495.56 per bond, carry a coupon rate of 10%, and distribute annual coupon payments. The company incurs a federal-plus-state tax rate of 25%. If PRC wants to issue new debt, what would be a reasonable estimate for its after-tax cost of debt (rounded to two decimal places)? (Note: Round your YTM rate to two decimal place.) 3.38% 3.53% 2.94% 2.35%The size of the national debt concerns many people, but it continues to grow. Let's look at three possible ways to respond. 1. Pay interest only each year with the principal unchanged. 2. Pay neither principal nor interest so the interest compounds annually. (This is basically the situation in many recent years.) 3. Pay off the principal and interest on a regular basis. Assume a debt of $10 billion, an interest rate of 7%, and a 30-year period. Look at the total obligation resulting from each of these three strategies. By total obligation, we mean the amount paid plus the amount owed at the end of 30 years. Which strategy results in the smallest total obligation? O To pay the interest only each year with the principal unchanged. To pay neither the principal nor the interest so the interest compounds annually. To pay off the principal and interest on a regular basis.
- Assume that the spot rate e = ¥124.5/$ and the three-month forward rate f = ¥ 127/$. Assume further that the annual interest rate in the U.S. is 4% and that in Japan is 6%. Determine the direction of the flow of funds and the exact net gain (not the approximate amount) from investment in percentage, given that short-term funds are invested for three months. As funds flow from one country to another, what will happen to the spot rate, the forward rate, the interest rate in the U.S., and the interest rate in Japan?To calculate the after-tax cost of debt, multiply the before-tax cost of debt by(1 – T) . Andalusian Limited (AL) can borrow funds at an interest rate of 9.70% for a period of six years. Its marginal federal-plus-state tax rate is 25%. AL’s after-tax cost of debt is 7.28% (rounded to two decimal places). At the present time, Andalusian Limited (AL) has 5-year noncallable bonds with a face value of $1,000 that are outstanding. These bonds have a current market price of $1,050.76 per bond, carry a coupon rate of 10%, and distribute annual coupon payments. The company incurs a federal-plus-state tax rate of 25%. If AL wants to issue new debt, what would be a reasonable estimate for its after-tax cost of debt (rounded to two decimal places)? (Note: Round your YTM rate to two decimal place.) 7.84% 5.88% 6.53% 5.22%K A government's share (in percent) of outstanding student debt in the years 2011, 2012, 2013, 2014, 2015, and 2016 is 90.4, 91.2, 91.7, 92.2, 92.4, and 92.6 respectively. Let p be the government's share (in percent) of outstanding student debt. Complete parts (a) through (c) below. a. Use points on a number line to describe the given values of p. 90 OB. 90 ○ C. 90 OD. 90 91 92 Government share of student debt (%) 93 91 92 93 Government share of student debt (%) 91 92 Government share of student debt (%) 91 Government share of student debt (%) 92 b. Did the government's share of outstanding student debt increase, decrease, stay approximately constant, or none of these from 2011 to 2016, inclusive? OA. The government's share of outstanding student debt stayed approximately constant. OOOO B. The government's share of outstanding student debt increased. C. The government's share of outstanding student debt decreased. D. None of these 93 93
- P4-15 (similar to) Perpetuities The Canadian Government has once again decided to issue a consol (a bond with a never-ending interest payment and no maturity date). The bond will pay $90 in interest each year (at the end of the year), but it will never return the principal. The current discount rate for Canadian government bonds is 7%. What should this consol bond sell for in the market? What if the interest rate should fall to 6%? Rise to 8%? Why does the price go up when interest rates fall? Why does the price go down when interest rates rise? If the current discount rate for Canadian government bonds is 7%, what should this bond sell for in the market? (Round to the nearest cent.)2. An overview of a firm's cost of debt To calculate the after-tax cost of debt, multiply the before-tax cost of debt by (1-T). Western Gas & Electric Company (WGC) can borrow funds at an interest rate of 11.10% for a period of six years. Its marginal federal-plus-state tax rate is 25%. WGC's after-tax cost of debt is 8.32% (rounded to two decimal places). At the present time, Western Gas & Electric Company (WGC) has 10-year noncallable bonds with a face value of $1,000 that are outstanding. These bonds have a current market price of $1,495.56 per bond, carry a coupon rate of 10%, and distribute annual coupon payments. The company incurs a federal-plus-state tax rate of 25%. If WGC wants to issue new debt, what would be a reasonable estimate for its after-tax cost of debt (rounded to two decimal places)? (Note: Round your YTM rate to two decimal place.) 2.94% 2.35% 2.65% 3.38%MHM Bank currently has$750million in transaction deposits on its balance sheet. The current reserve requirement is 8 percent, but the Federal Reserve is increasing this requirement to 10 percent. a. Show the balance sheet of the Federal Reserve and MHM Bank if MHM Bank converts all excess reserves to loans, but borrowers return only 50 percent of these funds to MHM Bank as transaction deposits.
