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.

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

Answered: LNP is a company with a liability of…

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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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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