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Answer accurately within 30 min URGENT On January 1, 2010 NukePower purchased a one-year $25,000,000 debt instrument that (1) guarantees the repayment of principal, (2)
Answer accurately within 30 min URGENT
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. 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 purchaseStep by Step Solution
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