On January 1, 2010 NukePower purchased a one-year $25,000,000 debt instrument that (1) guarantees the repayment of principal, (2) has a 1.50% annual coupon, and (3)provides for an additional return that is indexed to the price of Uranium (URA). Specifically, if the price of URA is above $850 per metric ton on 12/31/10, the holder of thedebt receives an additional return equal to the difference between the market price and the $850 per metric ton threshold price, based on 12,500 metric tons of URA. Theadditional return feature is not separable from the host debt instrument. The yield to maturity on a similar quality debt instrument which does not have an additional returnfeature is 7.00% annually (based on annual interest), which would result in an issuance price of $23,714,953. Details on the price of URA, URA Call and Put options isprovided below. Any interest calculations should use annual interest. The embedded option is designated as and qualifies as a cash flow hedge of anticipated fuelexpense when crude oil is purchased.URA Prices(Per metric ton)Date Spot Price Futures Price1/1/10$851.00$846$1,20012/31/10???Type your answer...URA Option Prices(per metric ton)DateCall12/31/10???Put??On December 31, 2010 the company receives cash payment for the entire settlement amount of the debt security. The embedded derivative is designated as and qualifies as acash flow hedge of fuel expense.The company purchases the uranium on January 2, 2011 at the December 31, 2010 spot price. How much fuel expense will the company report from the purchase?

Spot pricing refers to the prevailing market value of a financial instrument, commodity, or asset,…

On December 31, 2010 the company receives cash payment for the entire settlement amount of the debt security. The embedded derivative is designated as and qualifies as a cash flow hedge of fuel expense. The company purchases the uranium on January 2, 2011 at the December 31, 2010 spot price. How much fuel expense will the company report from the purchase?

On December 31, 2010 the company receives cash payment for the entire settlement amount of the debt security. The embedded derivative is designated as and qualifies as a cash flow hedge of fuel expense. The company purchases the uranium on January 2, 2011 at the December 31, 2010 spot price. How much fuel expense will the company report from the purchase?

Financial Reporting, Financial Statement Analysis and Valuation

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ISBN:9781285190907

Author:James M. Wahlen, Stephen P. Baginski, Mark Bradshaw

Publisher:James M. Wahlen, Stephen P. Baginski, Mark Bradshaw

Chapter9: Operating Activities

Section: Chapter Questions

Problem 18PC

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Question

On January 1, 2010 NukePower purchased a one-year $25,000,000 debt instrument that (1) guarantees the repayment of principal, (2) has a 1.50% annual coupon, and (3)
provides for an additional return that is indexed to the price of Uranium (URA). Specifically, if the price of URA is above $850 per metric ton on 12/31/10, the holder of the
debt receives an additional return equal to the difference between the market price and the $850 per metric ton threshold price, based on 12,500 metric tons of URA. The
additional return feature is not separable from the host debt instrument. The yield to maturity on a similar quality debt instrument which does not have an additional return
feature is 7.00% annually (based on annual interest), which would result in an issuance price of $23,714,953. Details on the price of URA, URA Call and Put options is
provided below. Any interest calculations should use annual interest. The embedded option is designated as and qualifies as a cash flow hedge of anticipated fuel
expense when crude oil is purchased.
URA Prices
(Per metric ton)
Date Spot Price Futures Price
1/1/10
$851.00
$846
$1,200
12/31/10
???
Type your answer...
URA Option Prices
(per metric ton)
Date
Call
12/31/10
???
Put
??
On December 31, 2010 the company receives cash payment for the entire settlement amount of the debt security. The embedded derivative is designated as and qualifies as a
cash flow hedge of fuel expense.
The company purchases the uranium on January 2, 2011 at the December 31, 2010 spot price. How much fuel expense will the company report from the purchase?

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