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Questions and Answers of Accounting

Joyce Company signed a lease for an office building for a period of 12 years. Under the lease agreement, a security deposit of $9,200 is made. The deposit will be returned at the expiration of the
Bates Company issued $1,000,000, 10-year bonds and agreed to make annual sinking fund deposits of $78,000. The deposits are made at the end of each year into an account paying 5% annual interest.
Frank and Maureen Fantazzi invested $6,000 in a savings account paying 4% annual interest when their daughter, Angela, was born. They also deposited $1,000 on each of her birthdays until she was 18
Hugh Curtin borrowed $34,000 on July 1, 2012. This amount plus accrued interest at 9% compounded annually is to be repaid on July 1, 2017. How much will Hugh have to repay on July 1, 2017?
For each of the following cases, indicate(a) To what interest rate columns and(b) To what number of periods you would refer in looking up the discount rate.(1) In Table 3 (present value of 1): (2)
(a) What is the present value of $28,000 due 9 periods from now, discounted at 10%?(b) What is the present value of $28,000 to be received at the end of each of 6 periods, discounted at 9%?
Chaffee Company is considering an investment that will return a lump sum of $750,000 five years from now. What amount should Chaffee Company pay for this investment to earn a 9% return?
Lloyd Company earns 10% on an investment that will return $480,000 eight years from now. What is the amount Lloyd should invest now to earn this rate of return?
Arthur Company is considering investing in an annuity contract that will return $45,000 annually at the end of each year for 15 years. What amount should Arthur Company pay for this investment if it
Kaehler Enterprises earns 8% on an investment that pays back $90,000 at the end of each of the next 6 years. What is the amount Kaehler Enterprises invested to earn the 8% rate of return?
Hanna Railroad Co. is about to issue $300,000 of 10-year bonds paying a 9% interest rate, with interest payable semiannually. The discount rate for such securities is 8%. How much can Hanna expect
Assume the same information as BED-13 except that the discount rate was 10% instead of 8%. In this case, how much can Hanna expect to receive from the sale of these bonds?
Tomas Taco Company receives a $64,000, 6-year note bearing interest of 6% (paid annually) from a customer at a time when the discount rate is 8%. What is the present value of the note received by
Gleason Enterprises issued 9%, 8-year, $2,600,000 par value bonds that pay interest semiannually on October 1 and April 1. The bonds are dated April 1, 2012, and are issued on that date. The
Mark Barton owns a garage and is contemplating purchasing a tire retreading machine for $18,000. After estimating costs and revenues, Mark projects a net cash flow from the retreading machine of
Frazier Company issues an 8%, 5-year mortgage note on January 1, 2012, to obtain financing for new equipment. Land is used as collateral for the note. The terms provide for semiannual installment
Leffler Company is considering purchasing equipment. The equipment will produce the following cash flows: Year 1, $38,000; Year 2, $40,000; and Year 3, $50,000.Leffler requires a minimum rate of
If Colleen Mooney invests $4,172.65 now and she will receive $10,000 at the end of 15 years, what annual rate of interest will Colleen earn on her investment?
Wayne Kurt has been offered the opportunity of investing $25,490 now. The investment will earn 10% per year and at the end of that time will return Wayne $80,000. How many years must Wayne wait to
Joanne Quick made an investment of $9,128.55. From this investment, she will receive $1,000 annually for the next 20 years starting one year from now. What rate of interest will Joanne’s investment
Patty Schleis invests $5,146.12 now for a series of $1,000 annual returns beginning one year from now. Patty will earn a return of 11% on the initial investment. How many annual payments of $1,000
Carly Simon wishes to invest $18,000 on July 1, 2012, and have it accumulate to $50,000 by July 1, 2022. Use a financial calculator to determine at what exact annual rate of interest Carly must
On July 17, 2012, James Taylor borrowed $60,000 from his grandfather to open a clothing store. Starting July 17, 2018, James has to make 10 equal annual payments of $8,860 each to repay the loan. Use
As the purchaser of a new house, Carrie Underwood has signed a mortgage note to pay the Nashville National Bank and Trust Co. $8,400 every 6 months for 20 years, at the end of which time she will own
Using a financial calculator, solve for the unknowns in each of the following situations.(a) On June 1, 2012, Holly Golightly purchases lakefront property from her neighbor, George Peppard, and
Using a financial calculator, provide a solution to each of the following situations.(a) Lynn Anglin owes a debt of $42,000 from the purchase of her new sport utility vehicle. The debt bears annual
Suppose interest rates on residential mortgages of equal risk are 5.5% in California and 7.0% in New York. Could this differential persist? What forces might tend to equalize rates? Would
Which fluctuate more—long-term or short-term interest rates? Why?
Suppose you believe that the economy is just entering a recession. Your firm must raise capital immediately, and debt will be used. Should you borrow on a long-term or a short-term basis? Why?
Suppose the population of Area Y is relatively young and the population of Area O is relatively old but everything else about the two areas is the same.a. Would interest rates likely be the same or
Suppose a new process was developed that could be used to make oil out of seawater. The equipment required is quite expensive; but it would, in time, lead to low prices for gasoline, electricity, and
Suppose a new and more liberal Congress and administration are elected. Their first order of business is to take away the independence of the Federal Reserve System and to force the Fed to greatly
It is a fact that the federal government (1) encouraged the development of the savings and loan industry, (2) virtually forced the industry to make long-term fixed-interest-rate mortgages, and (3)
Suppose interest rates on Treasury bonds rose from 5% to 9% as a result of higher interest rates in Europe. What effect would this have on the price of an average company’s common stock?
What does it mean when it is said that the United States is running a trade deficit? What impact will a trade deficit have on interest rates?
The following yields on U.S. Treasury securities were taken from a recent financial publication: a. Plot a yield curve based on these data.b. What type of yield curve is shown?c. What information
You read in The Wall Street Journal that 30-day T-bills are currently yielding 5.5%. Your brother-in-law, a broker at Safe and Sound Securities, has given you the following estimates of current
The real risk-free rate is 3%. Inflation is expected to be 2% this year and 4% during the next 2 years. Assume that the maturity risk premium is zero. What is the yield on 2-year Treasury
A Treasury bond that matures in 10 years has a yield of 6%. A 10-year corporate bond has a yield of 8%. Assume that the liquidity premium on the corporate bond is 0.5%. What is the default risk
The real risk-free rate is 3%, and inflation is expected to be 3% for the next 2 years. A 2-year Treasury security yields 6.2%. What is the maturity risk premium for the 2-year security?
An analyst is evaluating securities in a developing nation where the inflation rate is very high. As a result, the analyst has been warned not to ignore the cross-product between the real rate and
One-year Treasury securities yield 5%. The market anticipates that 1 year from now, 1-year Treasury securities will yield 6%. If the pure expectations theory is correct, what is the yield today for
Interest rates on 4-year Treasury securities are currently 7%, while 6-year Treasury securities yield 7.5%. If the pure expectations theory is correct, what does the market believe that 2-year
The real risk-free rate is 3%. Inflation is expected to be 3% this year, 4% next year, and 3.5% thereafter. The maturity risk premium is estimated to be 0.05 $ (t = 1)%, where t " number of years to
Due to a recession, expected inflation this year is only 3%. However, the inflation rate in Year 2 and thereafter is expected to be constant at some level above 3%. Assume that the expectations
A company’s 5-year bonds are yielding 7.75% per year. Treasury bonds with the same maturity are yielding 5.2% per year, and the real risk-free rate (r*) is 2.3%. The average inflation premium is
An investor in Treasury securities expects inflation to be 2.5% in Year 1, 3.2% in Year 2, and 3.6% each year thereafter. Assume that the real risk-free rate is 2.75% and that this rate will remain
The real risk-free rate, r*, is 2.5%. Inflation is expected to average 2.8% a year for the next 4 years, after which time inflation is expected to average 3.75% a year. Assume that there is no
Suppose 2-year Treasury bonds yield 4.5%, while 1-year bonds yield 3%. r* is 1%, and the maturity risk premium is zero. a. Using the expectations theory, what is the yield on a 1-year bond 1 year
Assume that the real risk-free rate is 2% and that the maturity risk premium is zero. If the 1-year bond yield is 5% and a 2-year bond (of similar risk) yields 7%, what is the 1-year interest rate
An analyst is evaluating securities in a developing nation where the inflation rate is very high. As a result, the analyst has been warned not to ignore the cross-product between the real rate and
A 5-year Treasury bond has a 5.2% yield. A 10-year Treasury bond yields 6.4%, and a 10-year corporate bond yields 8.4%. The market expects that inflation will average 2.5% over the next 10 years
Suppose the inflation rate is expected to be 7% next year, 5% the following year, and 3% thereafter. Assume that the real risk-free rate, r*, will remain at 2% and that maturity risk premiums on
In late 1980, the U.S. Commerce Department released new data showing inflation was 15%. At the time, the prime rate of interest was 21%, a record high. However, many investors expected the new Reagan
a. What effect would each of the following events likely have on the level of nominal interest rates?(1) Households dramatically increase their savings rate.(2) Corporations increase their demand for
What are the four most fundamental factors that affect the cost of money, or the general level of interest rates, in the economy?
What is the real risk-free rate of interest (r*) and the nominal risk-free rate (rRF)? How are these two rates measured?
Define the terms inflation premium (IP), default risk premium (DRP), liquidity premium (LP), and maturity risk premium (MRP). Which of these premiums is included when determining the interest rate
What is the term structure of interest rates? What is a yield curve?
Suppose most investors expect the inflation rate to be 5% next year, 6% the following year, and 8% thereafter. The real risk-free rate is 3%. The maturity risk premium is zero for bonds that mature
At any given time, how would the yield curve facing a AAA-rated company compare with the yield curve for U.S. Treasury securities? At any given time, how would the yield curve facing a BB-rated
What is the pure expectations theory? What does the pure expectations theory imply about the term structure of interest rates?
Suppose that you observe the following term structure for Treasury securities:MaturityYield1 year6.0%2 years6.23 years6.44 years6.55 years6.5Assume that the pure expectations theory of the term
What are the advantages and disadvantages of each procedure from the viewpoint of?(a) The firm and (b) The bondholders?
The values of outstanding bonds change whenever the going rate of interest changes. In general, short-term interest rates are more volatile than long-term interest rates. Therefore, short-term bond
If interest rates rise after a bond issue, what will happen to the bond’s price and YTM? Does the time to maturity affect the extent to which interest rate changes affect the bond’s price?
If you buy a callable bond and interest rates decline, will the value of your bond rise by as much as it would have risen if the bond had not been callable? Explain. Discuss.
Assume that you have a short investment horizon (less than 1 year). You are considering two investments: a 1-year Treasury security and a 20-year Treasury security. Which of the two investments would
Indicate whether each of the following actions will increase or decrease a bond’s yield to maturity:a. The bond’s price increases.b. The bond is downgraded by the rating agencies.c. A change in
Why is a call provision advantageous to a bond issuer? When would the issuer be likely to initiate a refunding call?
Are securities that provide for a sinking fund more or less risky from the bondholder’s perspective than those without this type of provision? Explain.
What’s the difference between a call for sinking fund purposes and a refunding call?
Why are convertibles and bonds with warrants typically offered with lower coupons than similarly rated straight bonds?
Explain whether the following statement is true or false: Only weak companies issue debentures.
Would the yield spread on a corporate bond over a Treasury bond with the same maturity tend to become wider or narrower if the economy appeared to be heading toward a recession? Would the change in
A bond’s expected return is sometimes estimated by its YTM and sometimes by its YTC. Under what conditions would the YTM provide a better estimate, and when would the YTC be better?
Callaghan Motors’ bonds have 10 years remaining to maturity. Interest is paid annually, they have a $1,000 par value, the coupon interest rate is 8%, and the yield to maturity is 9%. What is the
A bond has a $1,000 par value, 10 years to maturity, and a 7% annual coupon and sells for $985.a. What is its yield to maturity (YTM)?b. Assume that the yield to maturity remains constant for the
Nungesser Corporation’s outstanding bonds have a $1,000 par value, a 9% semiannual coupon, 8 years to maturity, and an 8.5% YTM. What is the bond’s price?
A firm’s bonds have a maturity of 10 years with a $1,000 face value, have an 8% semiannual coupon, are callable in 5 years at $1,050, and currently sell at a price of $1,100. What are their nominal
An investor has two bonds in his portfolio that have a face value of $1,000 and pay a 10% annual coupon. Bond L matures in 15 years, while Bond S matures in 1 year.a. What will the value of each
An investor has two bonds in her portfolio, Bond C and Bond Z. Each bond matures in 4 years, has a face value of $1,000, and has a yield to maturity of 9.6%. Bond C pays a 10% annual coupon, while
An investor purchased the following 5 bonds. Each bond had a par value of $1,000 and an 8% yield to maturity on the purchase day. Immediately after the investor purchased them, interest rates fell
Six years ago the Singleton Company issued 20-year bonds with a 14% annual coupon rate at their $1,000 par value. The bonds had a 9% call premium, with 5 years of call protection. Today Singleton
Heymann Company bonds have 4 years left to maturity. Interest is paid annually, and the bonds have a $1,000 par value and a coupon rate of 9%.a. What is the yield to maturity at a current market
Hooper Printing Inc. has bonds outstanding with 9 years left to maturity. The bonds have an 8% annual coupon rate and were issued 1 year ago at their par value of $1,000. However, due to changes in
Last year Clark Company issued a 10-year, 12% semiannual coupon bond at its par value of $1,000. Currently, the bond can be called in 4 years at a price of $1,060 and it sells for $1,100.a. What are
It is now January 1, 2009, and you are considering the purchase of an outstanding bond that was issued on January 1, 2007. It has a 9.5% annual coupon and had a 30-year original maturity. (It matures
An 8% semiannual coupon bond matures in 5 years. The bond has a face value of $1,000 and a current yield of 8.21%. What are the bond’s price and YTM?
Lloyd Corporation’s 14% coupon rate, semiannual payment, $1,000 par value bonds, which mature in 30 years, are callable 5 years from today at $1,050. They sell at a price of $1,353.54, and the
Bond X is noncallable and has 20 years to maturity, a 9% annual coupon, and a $1,000 par value. Your required return on Bond X is 10%; and if you buy it, you plan to hold it for 5 years. You (and the
You are considering a 10-year, $1,000 par value bond. Its coupon rate is 9%, and interest is paid semiannually. If you require an “effective” annual interest rate (not a nominal rate) of 8.16%,
Last year Joan purchased a $1,000 face value corporate bond with an 11% annual coupon rate and a 10-year maturity. At the time of the purchase, it had an expected yield to maturity of 9.79%. If Joan
Look back at Table 7-4 and examine United Parcel Service and Telecom Italia Capital bonds that mature in 2013. a. If these companies were to sell new $1,000 par value long-term bonds, approximately
Kaufman Enterprises has bonds outstanding with a $1,000 face value and 10 years left until maturity. They have an 11% annual coupon payment, and their current price is $1,175. The bonds may be
Clifford Clark is a recent retiree who is interested in investing some of his savings in corporate bonds. His financial planner has suggested the following bonds:• Bond A has a 7% annual coupon,
What are a bond’s key features?
What are call provisions and sinking fund provisions? Do these provisions make bonds more or less risky?
How is the value of any asset whose value is based on expected future cash flows determined? Discuss.
How is a bond’s value determined? What is the value of a 10-year, $1,000 par value bond with a 10% annual coupon if its required return is 10%?

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