Which of the following agreements is the most consistent with the terms of a typical option contract? Company A will pay 6% fixed interest to ABC Bank in exchange for interest based on a floating index Company C will receive payment from NYC Bank in the event of default by its primary bond issuer Company D has paid a fee for the right to buy 1,000 shares of Proctor & Gamble stock for a specified price Company B is obligated to purchase $5 million of corporate bonds at a specified price in 3 years

Which of the following agreements is the most consistent with the terms of a typical option contract? Company A will pay 6% fixed interest to ABC Bank in exchange for interest based on a floating index Company C will receive payment from NYC Bank in the event of default by its primary bond issuer Company D has paid a fee for the right to buy 1,000 shares of Proctor & Gamble stock for a specified price Company B is obligated to purchase $5 million of corporate bonds at a specified price in 3 years

Essentials Of Investments

11th Edition

ISBN:9781260013924

Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Chapter1: Investments: Background And Issues

Section: Chapter Questions

Problem 1PS

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On January 1, 2024, Rapid Airlines issued $245 million of its 10% bonds for $226 million. The bonds were priced to yield 12%. Interest is payable semiannually on June 30 and December 31. Rapid Airlines records interest at the effective rate and elected the option to report these bonds at their fair value. On December 31, 2024, the fair value of the bonds was $234 million as determined by their market value in the over-the-counter market. Rapid determined that $1,000,000 of the increase in fair value was due to a decline in general interest rates. Questions: 1. to 3. Prepare the journal entries to record interest on June 30, 2024 (the first interest payment), on December 31, 2024 (the second interest payment) and to adjust the bonds to their fair value for presentation in the December 31, 2024, balance sheet.
22. Sunset Company showed the following data with respect to a matured obligation: Mortgage payable 8,000,000 Accrued interest payable 600,000 The entity is threatened with a court suit if it could not pay its maturing debt. Accordingly, the entity entered into an agreement with the creditor for the issuance of share capital in full settlement of the mortgage. The agreement provided for the issue of 35,000 shares with par value of 100. The share is currently quoted at 130. The fair value of the liability is 4,500,000. Prepare the journal entry to record the equity swap on the books of Sunset Company.
Fuzzy Monkey Technologies, Incorporated purchased as a long-term investment $150 million of 6% bonds, dated January 1, on January 1, 2024. Management intends to have the investment available for sale when circumstances warrant. When the company purchased the bonds, management elected to account for them under the fair value option. For bonds of similar risk and maturity the market yield was 8%. The price paid for the bonds was $133 million. Interest is received semiannually on June 30 and December 31. Due to changing market conditions, the fair value of the bonds at December 31, 2024, was $140 million. Required: 1. to 3. Prepare the relevant journal entries on the respective dates (record the interest at the effective rate). 4-a. At what amount will Fuzzy Monkey report its investment in the December 31, 2024, balance sheet? 4-b. Prepare the journal entry necessary to achieve this reporting objective. 5. How would Fuzzy Monkey’s 2024 statement of cash flows be affected by this…
The Acme Insurance Company purchased a 5-year bond whose interestrate floats with LIBOR. Specifically, the interest rate in a given year isequal to LIBOR plus 200 basis points. At the same time the insurancecompany purchases this bond, it enters into a floor agreement with theBear Stearns in which the notional amount is Ҏ35 million with a strikeprice of 6%. The premium Acme Insurance Company agrees to pay BearStearns each year is Ҏ300,000. a) Suppose at the time that it is necessary to determinewhether a payment must be made by Bear Stearns, LIBORis 9%. How much must Bear Stearns pay to Acme InsuranceCompany?b) Suppose at the time that it is necessary to determinewhether a payment must be made by Bear Stearns, LIBORis 3%. How much Bear Stearns pay to Acme InsuranceCompany?
Company XYX buys a convertible bond for $7,500,000. The bond has a 5% coupon rate and is also convertible by it's contractual terms into 750,000 shares of the issuer's common stock, which are publicly traded. Company XYZ determines that the conversion option is an embedded derivative as it would meet the definition of a derivative it it were freestanding. In addition, Company XYZ has determined that the features of the conversion option are not clearly and closely related to its debt host. The derivative has a fair value of $750,000 at inception.. The company also has determined that the bond instrument will be classified as a trading debt security. Which of the following entries would be approriate for the company to record upon the purchase of his security.? Dr. Debt security-trading Dr. Derivative financial instrument Cr. Cash Dr. Debt security-trading Cr. Cash Dr. Debt security-trading Dr. Derivative Financial Instrument Cr. Cash Cr. Other Comprehensive Income Dr. Debt…
On January 1, 2021, LLB Industries borrowed $370,000 from Trust Bank by issuing a two-year, 8% note, with interest payable quarterly. LLB entered into a two-year interest rate swap agreement on January 1, 2021, and designated the swap as a fair value hedge. Its intent was to hedge the risk that general interest rates will decline, causing the fair value of its debt to increase. The agreement called for the company to receive payment based on a 8% fixed interest rate on a notional amount of $370,000 and to pay interest based on a floating interest rate. The contract called for cash settlement of the net interest amount quarterly. Floating (LIBOR) settlement rates were 8% at January 1, 6% at March 31, and 4% June 30, 2021. The fair values of the swap are quotes obtained from a derivatives dealer. Those quotes and the fair values of the note are as indicated below. Fair value of interest rate swap Fair value of note payable Required: 1. Calculate the net cash settlement at March 31 and…
On January 2, 2023, the Suns, Inc. issued P2,000,000 of 8% convertible bonds at par.The bonds will mature on January 1, 2027 and interest is payable annually every January 1. The bond contract entitles the bondholders to receive 6 shares of P100 par valuecommon stock in exchange for each P1,000 bond. On the date of issue, the prevailingmarket interest rate for similar debt without the conversion option is 10%. On January 1, 2027, the holders of the bonds with total face value of P1,000,000 exercised their conversion privilege. On that date, the bonds were selling at 110 and the Ordinary share at P42. 1. How much of the proceeds from the issuance of convertible bonds should be allocatedto equity? P126,816 2. How much is the interest expense for the year 2024? P190,050 3. The entry to record the conversion on December 31, 2005 will include a credit to APIC of? P365,276 4. How much is the loss on bond reacquisition on December 31, 2005? P67,362 5. How much is the carrying value of the…
The balance sheet at December 31, 2024, for Nevada Harvester Corporation includes the liabilities listed below: a. 7% bonds with a face amount of $46 million were issued for $46 million on October 31, 2015. The bonds mature on October 31, 2035. Bondholders have the option of calling (demanding payment on) the bonds on October 31, 2025, at a redemption price of $46 million. Market conditions are such that the call is not expected to be exercised. b. Management intended to refinance $6.6 million of its 14% notes that mature in May 2025. In early March, prior to the actual issuance of the 2024 financial statements, Nevada Harvester negotiated a line of credit with a commercial bank for up to $4.6 million any time during 2025. Any borrowings will mature two years from the date of borrowing. c. Noncallable 6% bonds with a face amount of $14.5 million were issued for $14.5 million on September 30, 2005. The bonds mature on September 30, 2025. Sufficient cash is expected to be available to…
On January 1, 2021, Labtech Circuits borrowed $300,000 from First Bank by issuing a three-year, 6% note, payable on December 31, 2023. Labtech wanted to hedge the risk that general interest rates will decline, causing the fair value of its debt to increase. Therefore, Labtech entered into a three-year interest rate swap agreement on January 1, 2021, and designated the swap as a fair value hedge. The agreement called for the company to receive payment based on an 8% fixed interest rate on a notional amount of $300,000 and to pay interest based on a floating interest rate tied to LIBOR. The contract called for cash settlement of the net interest amount on December 31 of each year. Floating (LIBOR) settlement rates were 8% at inception and 9%, 7%, and 7% at the end of 2021, 2022, and 2023, respectively. The fair values of the swap are quotes obtained from a derivatives dealer. These quotes and the fair values of the note are as follows: January 1 December 31 2021 2021 2022 2023…
Florence Inc. issued 8,000, 5-year convertible bonds of $2,000 each for $4,000,000 at the beginning of 2021. The bonds have a stated rate of interest of 9% and interest is payable annually. Each bond can be convertible into 100 shares with a par value of $10. The market rate of similar nonconvertible debt is 10%. Determine the fair value of the equity component using the “with-and-without” method is a. $3,848,288 b. $2,483,600 c. $1,365,688 d. $151,712
On January 1, 2021, Ithaca Corp. purchases Cortland Inc. bonds that have a face value of $210,000. The Cortland bonds have a stated interest rate of 10%. Interest is paid semiannually on June 30 and December 31, and the bonds mature in 10 years. For bonds of similar risk and maturity, the market yield on particular dates is as follows: (FV of $1, PV of $1, FVA of $1, PVA of $1, FVAD of $1 and PVAD of $1) (Use appropriate factor(s) from the tables provided.): January 1, 2021 11.0 % June 30, 2021 12.0 % Required:1. Calculate the price Ithaca would have paid for the Cortland bonds on January 1, 2021 (ignoring brokerage fees), and prepare a journal entry to record the purchase.2. Prepare all appropriate journal entries related to the bond investment during 2021, assuming Ithaca accounts for the bonds as a held-to-maturity investment. Ithaca calculates interest revenue at the effective interest rate as of the date it purchased the bonds.3. Prepare all appropriate…
Mf2. On January 1, 2022. Sarasota Company purchased 12% bonds having a maturity value of $430,000 for $462,600.36. The bonds provide the bondholders with a 10% yield. They are dated January 1, 2022, and mature January 1, 2027, with interest receivable December 31 of each year. Sarasota elected the fair value option for this held-for-collection investment. Prepare any entry necessary at December 31, 2022, assuming the fair value of the bonds is $464,400. (Round answers to 2 decimal places, e.g. 5,275.25. Credit account titles are automatically indented when the amount is entered. Do not indent manually. If no entry is required, select "No Entry" for the account titles and enter O for the amounts.)

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