Leela Crosby and Alysha Shroff I did the questions and Alysha did the vocabulary ACTIVITY 1 Bond- a certificate issued by a government or a public company promising to repay borrowed money at a fixed rate of interest at a specified time. Capital Gains- a profit from the sale of property or of an investment. Capital Goods- goods that are used in producing other goods, rather than being bought by consumers. Capital Loss- is the result of selling an investment at less than the purchase price or adjusted basis. Common Stock- shares entitling their holder to dividends that vary in amount and may even be missed, depending on the fortunes of the company.
At the first pricing (LIBOR = 6.95%), The subsidiary 's net cash payment is calculated as follows: Payment – Receipt = (0.0766 – 0.0695) *100000000*(91/365) = $160,000 At the second pricing (LIBOR = 7.66%), the subsidiary 's net cash receipt is calculated as follows: Receipt – Payment = (0.0766 – 0.0695) *100000000*(91/365) = $160,000. c. The subsidiary assumes the interest rate risk in the swap. On the other hand, the intermediary assumes credit risk. Activity IV: 1. a. the effective loan yield will decrease as a result of the increase in the LIBOR and the bank may not be able to make loans in the future. b. the effective loan yield will increase as a result of the decrease in the LIBOR and the bank would be able to offer more loans in the future.
(2 points) A bond is defined by its face value, coupon rate, maturity rate, and tax treatment. Bond prices and interest rates have an inverse relationship. This means that when one goes up, the other one goes down. In other words, when the interest rate goes up, then the present value is going to fall. For example, if I pay a high price to purchase a bond, then a smaller percentage of what I get back counts as interest.
It is the rate at which depository institutions borrow and lend from one another in the federal funds market. The FOMC’s open market operations lower the rate by increasing the reserves supplied to the economy, or alternatively, raise the rate by reducing the supply of balances. Due to a term structure of interest rates, the changes in the short-term interest rates are transmitted to the long-term interest rates since the financial markets expect the changes to persist for an extended period of time or assume that they convey information about the future monetary policy. Also, the inflation inertia ensures that the change in the federal funds rate effectively influences the real interest rate which is equivalent of the cost of borrowing. By altering the cost, federal funds rate indirectly affects the spending and investment by households and businesses, which on their turn, impact output and inflation in the economy.
The Basic DCF models The value of a firm is the Present value of all the expected future cash flows and if we are an investor and hold an equity share then what do we get, what is our cash flow? Till the time we hold the stock the only cash flow we receive is the Dividend, hence the starting point and simplest way of valuing an equity Investment is Dividend Discount Model. Like in Bonds, the person buying stock expects two kinds of cash flows one the regular dividends and the price at the end of the period and can be easily expressed and the future price is nothing but the present value of all the dividends till infinity. Value per share=∑_(t=1)^(t=∝)▒〖E(DPSt〗)/ (1+Ke) ^t DPSt=Expected Dividend per share Ke= cost of Equity As far as this model
have total liabilities of 37.51% with respect to the total asset of the company. It imply around the ratio of debt to assets is 3:10 in 2010. In 2009, the debt-assets ratio was 29.81%. It imply the debt-asset ratio of the company have an increase of 7.7% from 2009 to 2010. For Total shareholder equity- asset ratio, the company have decrease of 70.19% in 2009 to 62.49% in 2010.
A) decrease; increase B) decrease; decrease C) increase; decrease D) increase; increase 15) Assuming initially that rr = 15%, c = 40%, and e = 5%, an increase in e to 10% causes the M1 money multiplier to ________, everything else held constant. A) decrease from 2.33 to 2.15 B) increase from 2.15 to 2.33 C) decrease from 1.67 to 1.54 D) increase from 1.54 to 1.67 16) During the bank panics of the Great Depression the currency ratio A) decreased sharply. B) increased slightly. C) increased sharply. D) decreased slightly.
Stock valuation is the process of determining the current worth of an asset or a company. There are two types of valuation, which include fundamental analysis (FA) and technical analysis (TA). The example of the first one is top-down approach and bottom-up approach for the second. FA is the more enhance than TA as it involve the financial and economic analysis to visualize the movement of stock prices, while TA is more on forecasting future prices based on the inspection of past price movements while avoiding losses. Dividend Discount Model (DDM) is one of the example among TA.
In such a case, the firm approaches the major shareholder to acquire its shares often at a significant premium above market price (Peyer & Vermaelen, 2005). This type of transaction is called “greenmail”. Second, a major shareholder might want to sell a large number of a firm’s shares, however the market for the firm’s shares is insufficiently liquid. If the market is illiquid, selling such a large portion of a firm’s shares might induce a substantial impact on the share price. To avoid such a disruptive impact the shareholder might approach the firm and negotiate the repurchase of shares via a private transaction.
Therefore, we need to eliminate that remaining premium or discount before redeeming the bond. To know if redeeming bond before maturity is good or bad for a company, we need to consider two values, the cash that the company spend to early redeem the bond and the carrying value of a bond at the point of redeeming. If the cash paid is greater than the carrying value, the company records a gain in retirement of bonds. If cash paid is lesser than the carrying value, the company records a loss in retirement of bonds. Is redeeming bond before maturity good for Susan’s Tire Tower?