LNP is a company with a liability of $110 million due in 10 years. The company’s only asset is $70 million held in cash. Throughout this question, assume the term structure of interest rates is flat at 5%. Determine the present value of the company’s liability. Without doing any calculations, briefly explain why holding all its assets in cash is problematic for LNP from an interest rate risk management perspective.
LNP is a company with a liability of $110 million due in 10 years. The company’s only asset is $70 million held in cash. Throughout this question, assume the term structure of interest rates is flat at 5%. Determine the present value of the company’s liability. Without doing any calculations, briefly explain why holding all its assets in cash is problematic for LNP from an interest rate risk management perspective.
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
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LNP is a company with a liability of $110 million due in 10 years. The company’s only asset is $70 million held in cash. Throughout this question, assume the term structure of interest rates is flat at 5%.
- Determine the present value of the company’s liability.
- Without doing any calculations, briefly explain why holding all its assets in cash is problematic for LNP from an interest rate risk management perspective.
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