Foundations Of Finance
Foundations Of Finance
10th Edition
ISBN: 9780134897264
Author: KEOWN, Arthur J., Martin, John D., PETTY, J. William
Publisher: Pearson,
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Chapter 2, Problem 5MC
Summary Introduction

Case Summary:

During the period of summer internship, person X have been assigned to work with chief financial officer (CFO) of company S incorporation. The CFO decided to assess person X’s understanding of interest rates. Particularly, the CFO asked to provide reasonable forecast of nominal rate of interest for a new issue of AAA rated bonds offered by company S.

To determine: The liquidity risk premium and place result in to the format of equation (2-1).

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Use the following information for the next 4 items: You were assigned to audit the borrowings of your client, Benedict Company, as of and for the year ended December 31, 2022. Upon examining their records, and inquiry with management, you have found out that the company has the following notes outstanding as of December 31, 2022: A 10%-note issued to Supreme Inc. in exchange for a second-hand delivery vehicle on June 30, 2022. The face amount of the note is P800,000 and is due on June 30, 2027. Interest is payable semi-annually every June 30 and December 31. On the date of issuance, the delivery vehicle does not have a reliable fair market value, and the annual prevailing market rate of interest at that time for notes with similar characteristics is 12%. A three-year 12% note issued to Ace Company with principal amount of P1,500,000 dated November 30, 2021. The principal is payable in three installments of P500,000 plus interest on outstanding balance every November 30, beginning on…
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