INTERMEDIATE ACCOUNTING (LL) W/CONNECT
9th Edition
ISBN: 9781260679694
Author: SPICELAND
Publisher: MCG
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Chapter A, Problem 3Q
To determine
Derivatives: Derivatives are some financial instruments which are meant for managing risk and safeguard the risk created by other financial instruments. These financial instruments derive the values from the future value of underlying security or index. Some examples of derivatives are forward contracts, interest rate swaps, futures, and options.
Interest rate swap: This is a type of derivative used by two parties under a contract to exchange the consequences (net cash difference between interest payments) of fixed interest rate for floating interest rate, or vice versa, without exchanging the principal or notional amounts.
To determine: The effect of gain or loss on the notional difference of $500,000, the difference between fixed rate debt of $2,000,000, and the $2,500,000 interest rate swap
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Students have asked these similar questions
Which of the following statements is CORRECT?
O a. The NYSE is an example of an over-the-counter market.
O b. Only institutions, and not individuals, can engage in derivative market transactions.
O c. If you purchase 100 shares of Disney stock from your brother-in-law, this is an example of a primary market transaction.
O d. As they are generally defined, money market transactions involve debt securities with maturities of less than one year.
e. If Disney issues additional shares of common stock through an investment banker, this would be a secondary market transaction.
Slush Corporation has two bonds outstanding, each with a face value of $2.3 million. Bond A is secured on the
company's head office building; bond B is unsecured. Slush has suffered a severe downturn in demand. Its
head office building is worth $1.03 million, but its remaining assets are now worth only $2 million. If the
company defaults, what payoff can the holders of bond B expect?
Note: Enter your answer in dollars, not in millions. Round your answer to the nearest whole dollar amount.
Payoff of bond B
The RBA decides to buy bonds and securities from commercial banks on the open market. Other things being equal, this will result in a(n) _________ in the price of financial assets.
short term increase, but longer-term fall
increase
decrease
short term decrease, but longer-term rise
no change
Chapter A Solutions
INTERMEDIATE ACCOUNTING (LL) W/CONNECT
Ch. A - Prob. A.1QCh. A - Prob. 2QCh. A - Prob. A.2QCh. A - Prob. 3QCh. A - Prob. A.3QCh. A - Prob. 4QCh. A - Prob. A.4QCh. A - What is the effect on interest of an interest rate...Ch. A - Prob. A.5QCh. A - How are derivatives reported on the balance sheet?...
Ch. A - Prob. A.6QCh. A - When is a gain or a loss from a cash flow hedge...Ch. A - Prob. A.7QCh. A - Prob. 1ECh. A - Prob. A.1ECh. A - Derivatives; interest rate swap; fixed rate debt...Ch. A - Derivatives; interest rate swap; fixed rate...Ch. A - Derivatives; interest rate swap; fixed rate debt;...Ch. A - Prob. 5ECh. A - Derivatives; interest rate swap; fixed-rate debt;...Ch. A - Derivatives; interest rate swap On January 1,...Ch. A - Derivatives; interest rate swap; comprehensive...Ch. A - Derivatives; interest rate swap; fixed rate debt;...Ch. A - Real World Case A1 Derivative losses; recognition...Ch. A - Research Case A4 Issue related to the derivatives...Ch. A - Prob. A.4BYP
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- LNP is a company with a liability of $110 million,which is due in 10 years. The company’s lone asset is $70 million held in cash. The only assumption is that term structure of interest rates remains flat at 5%. (a) Determine the present value of the company’s liability. (b) Without any calculations,briefly explain why holding all its assets in cash is problematic for LNP from an interest rate risk management perspective. Two bonds, A and B, are currently trading. Bond A is a 3-year coupon bond with a face value of $100, selling for $113.616; coupons are paid annually. Bond B is a perpetuity with an initial cash flow of $1 in one year’s time, with cash flows growing thereafter at 1% per year. (c) Caluclate Bond A’s coupon rate and the pricing of Bond B.arrow_forwardSlush Corporation has two bonds outstanding, each with a face value of $3.1 million. Bond A is secured on the company’s head office building; bond B is unsecured. Slush has suffered a severe downturn in demand. Its head office building is worth $1.11 million, but its remaining assets are now worth only $2 million. If the company defaults, what payoff can the holders of bond B expect?arrow_forwardYou enter into a "reverse repo" transaction meaning that the counterparty delivers some securities (let's say t-bonds) to you and borrows from you. According to the agreement, you lend 25.000 TL for 20 days with an annual repo yield of 8%. However, suppose that you immediately needed urgent liquidity. You decided to enter into a "repo" transaction now with another party by using the t- bonds of the reverse repo counterparty. This new agreement allows you to borrow 20.000 TL for 8 days with an annual repo yield of 6%. What would be the total profit at the maturity of the "repo" transaction? (1 year = 360 days)arrow_forward
- Which of the following statements is not correct? Select the correct response: The principal amount of a debt is the cash or cash equivalent amount borrowed The carrying amount of a noninterest-bearing note payable due in lump sum will decrease as time goes by When a noncash asset is acquired and the stated rate of interest is different from the current market rate of interest, the cost of the asset is the present value of the future cash payments discounted at the current market rate of interest rather than at the stated interest rate. A company that receives cash in an amount less than the face amount of a noninterest-bearing note payable should record the note at its discounted present value.arrow_forwardSlush Corporation has two bonds outstanding, each with a face value of $3 million. Bond A is secured on the company's head office building; bond B is unsecured. Slush has suffered a severe downturn in demand. Its head office building is worth $1.10 million, but its remaining assets are now worth only $2 million. If the company defaults, what payoff can the holders of bond B expect? (Enter your answer in dollars, not in millions. Round your answer to the nearest whole dollar amount.) Answer is complete but not entirely correct. Payoff of bond B $ 2,000,000 Xarrow_forwardBaghibenarrow_forward
- Which of the following are typical negotiable certificate of deposit (NCD) denominations? Check all that apply. $300,000 $500,000 $1,000,000 $5,000,000 Which of the following are characteristics of negotiable certificates of deposit (NCD)? Check all that apply. Firms are the most common direct investors in these securities. They provide a return in the form of interest along with the difference between the secondary market selling price and the original purchase price. Activity in their secondary market is low. Their denominations are typically in multiples of $100,000. Suppose Larry purchased an NCD a year ago on the secondary market for $991,000 and redeems it today upon maturity for $1,000,000 plus $44,000 in interest. The annualized yield on this NCD is: 4.81% 5.19% 5.35% 5.78%arrow_forwardIf a company issues $15,000,00 worth of bonds with a face interest rate equal to the market interest rate, the bonds will sell at an amount Group of answer choices A)less than $15,000,000. b)equal to $15,000,000. C)greater than $15,000,000. D)that can’t be determined from the information provided in the problem.arrow_forward1. If bonds are sold at a discount and the straight-line method of amortization is used, interest expense in earlier years will: (A) Exceed what is would have been had the effective interest rate method of amortization been used. (B) Be less than what it would have been had the effective interest rate method of amortization been used. (C) Be the same as it would have been had the effective interest rate method of amortization been used. (D) None of the above.arrow_forward
- Give typing answer with explanation and conclusionarrow_forwardFor the next three questions (1-3) assume what follows: Assume that you acquired a previously issued debt instrument. According to its specifications, it promised to pay $1,000 precisely in two years from the day of its original issue. At the time it was issued, investors anticipated 8.00% in interest on instruments with similar characteristics and risk level. *Note, standard rounding rules apply to all calculations! Q1. What price did you have to pay for this security - under assumption that you acquired it in a secondary market precisely three months after its original issuing, and taking into account that at the time of your acquisition investors anticipated to earn 10.00% in interest on securities with similar features and risk characteristics? A). $857.34 B). $846.37 3000K ASarrow_forwardA firm's assets are currently valued at $700.9 million, its current liabilities are $ 120 million, and long-term -liabilities are $300 million . the standard deviation of expected asset value $76 million . assume the firm has no other debt and that the ratio of long-term -liabilities -to-short- term -liabilities is less than 1.5, what will be the appropriate distance to default measure when utilizing Moody's KMV credit Monitor * ? model standard deviations 5.66 standard deviations 9.21 standard deviations 3.68 standard deviations 1.87arrow_forward
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