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financial accounting

Questions and Answers of Financial Accounting

Explain the use of a sinking-fund provision. How can it reduce the investor's risk?
What are protective covenants? Why are they needed?
Explain the use of call provisions on bonds. How can a call provision affect the price of a bond?
Explain the use of bond collateral, and identify the common types of collateral for bonds.
What are debentures? How do they differ from subordinated debentures?
What are the advantages and disadvantages to a firm that issues low- or zero-coupon bonds?
Are variable-rate bonds attractive to investors who expect interest rates to decrease? Explain. Would a firm that needs to borrow funds consider issuing variable-rate bonds if it expects that
Why can convertible bonds be issued by firms at a higher price than other bonds?
Write a short essay on the integration of bond markets. Explain why adverse conditions within one bond market (such as a particular country) commonly spread to other bond markets.
a. "The values of some stocks are dependent on the bond market. When investors are not interested in junk bonds, the values of stocks ripe for leveraged buyouts decline." b. "The recent trend in
a. If your expectations are correct, how will the return of each investment be affected over a one-year horizon? b. If your expectations are correct, which of the three investments should have the
a. Assume that Carson has two choices to satisfy the increased demand for its products. It could increase production by 10 percent with its existing facilities. In this case, it could obtain
An inflation-indexed Treasury bond has a par value of $1,000 and a coupon rate of 6 percent. An investor purchases this bond and holds it for one year. During the year, the consumer price index
Assume that the U.S. economy experienced deflation during the year, and that the consumer price index decreased by 1 percent in the first six months of the year, and by 2 percent during the second
Assume that inflation is expected to decline in the near future. How could this affect future bond prices? Would you recommend that financial institutions increase or decrease their concentration in
Explain the concept of bond price elasticity. Would bond price elasticity suggest a higher price sensitivity for zero-coupon bonds or high-coupon bonds that are offering the same yield to maturity?
An analyst recently suggested that there will be a major economic expansion that will favorably affect the prices of high-rated fixed-rate bonds, because the credit risk of bonds will decline as
When tensions rise or war erupts in the Middle East, bond prices in many countries tend to decline. What is the link between problems in the Middle East and bond prices? Would you expect bond prices
Explain how bond prices may be affected by money supply growth, oil prices, and economic growth.
Assume that oil-producing countries have agreed to reduce their oil production by 30 percent. How would bond prices be affected by this announcement? Explain.
Assume that breaking news causes bond portfolio managers to suddenly expect much higher economic growth. How might bond prices be affected by this expectation? Explain. Now assume that breaking news
Assume that the bond market participants suddenly expect the Fed to substantially increase the money supply. a. Assuming no threat of inflation, how would bond prices be affected by this
Bond portfolio managers closely monitor the trade deficit figures, because the trade deficit can affect exchange rates, which can affect inflationary expectations and therefore interest rates. a.
A U.S. insurance company purchased British 20-year Treasury bonds instead of U.S. 20-year Treasury bonds because the coupon rate was 2 percentage points higher on the British bonds. Assume that the
Explain the impact of a decline in interest rates on: a. An investor's required rate of return. b. The present value of existing bonds. c. The prices of existing bonds.
The pension fund manager of Utterback (a U.S. firm) purchased German 20-year Treasury bonds instead of U.S. 20-year Treasury bonds. The coupon rate was 2 percent lower on the German bonds. Assume
Assume that there is a sudden shift in the yield curve, such that the new yield curve is higher and more steeply sloped today than it was yesterday. If a firm issues new bonds today, would its bonds
Consider the prevailing conditions for inflation (including oil prices), the economy, the budget deficit, and the Fed's monetary policy that could affect interest rates. Based on prevailing
Assume that you maintain bonds and money market securities in your portfolio, and you suddenly believe that long-term interest rates will rise substantially tomorrow (even though the market does not
Explain why there are concerns about systemic risk in the bond and other debt markets. Also explain how the Financial Reform Act of 2010 was intended to reduce systemic risk.
Explain why debt crises in some European countries can cause financial problems in other European countries.
Explain why fiscal policy is not normally effective in stimulating the economy of a European country that is experiencing debt repayment problems.
Describe the conditions imposed by the European Central Bank (ECB) when it provides credit to European country governments with debt repayment problems.
Determine the direction of bond prices over the last year and explain the reason for it.
How would a financial institution with a large bond portfolio be affected by falling interest rates? Would it be affected more than a financial institution with a greater concentration of bonds (and
If a bond's coupon rate is above the investor's required rate of return on the bond, would the bond's price be above or below its par value? Explain.
Is the price of a long-term bond or the price of a short-term security more sensitive to a change in interest rates? Why?
The credit crisis was caused by the mortgage market, yet it had a serious impact on bond markets. Write a short essay on how the bond market was affected, and offer your opinion on how the bond
a. "Given the recent uncertainty about future interest rates, investors are fleeing from zero-coupon bonds." b. "Catrell Insurance Company invests heavily in bonds, and its stock price increased
a. What is the annual interest you would earn (before taxes) on the municipal bond? On the corporate bond?b. Assume that you are in the 20 percent tax bracket. If the level of credit risk and the
a. At a recent meeting, the Chief Executive Officer (CEO) stated his view that the economy will remain strong, as the Fed's monetary policy is not likely to have a major impact on the interest rates.
Assume the following information for an existing bond that provides annual coupon payments: Par value = $1,000 Coupon rate = 11% Maturity = 4 years Required rate of return by investors = 11% a. What
Ash Investment Company manages a broad portfolio with this composition:Ash expects that in four years, investors in the market will require an 8 percent return on the zero-coupon bonds, a 7 percent
a. A zero-coupon bond with a par value of $1,000 matures in 10 years. At what price would this bond provide a yield to maturity that matches the current market rate of 8 percent?b. What happens to
You are interested in buying a $1,000 par value bond with 10 years to maturity and an 8 percent coupon rate that is paid semiannually. How much should you be willing to pay for the bond if the
A bond you are interested in pays an annual coupon of 4 percent, has a yield to maturity of 6 percent and has 13 years to maturity. If interest rates remain unchanged, at what price would you expect
a. How would the present value (and therefore the market value) of a bond be affected if the coupon payments are smaller and other factors remain constant? b. How would the present value (and
Determine how the bond elasticity would be affected if the bond price changed by a larger amount, holding the change in the required rate of return constant.
A bond has a duration of 5 years and a yield to maturity of 9 percent. If the yield to maturity changes to 10 percent, what should be the percentage price change of the bond?
Describe how bond convexity affects the theoretical linear price-yield relationship of bonds. What are the implications of bond convexity for estimating changes in bond prices?
Assume the following information for existing zero-coupon bonds: Par value = $100,000 Maturity = 3 years Required rate of return by investors = 12% How much should investors be willing to pay for
Assume that you require a 14 percent return on a zero-coupon bond with a par value of $1,000 and six years to maturity. What is the price you should be willing to pay for this bond?
Cardinal Company, a U.S.-based insurance company, considers purchasing bonds denominated in Canadian dollars, with a maturity of six years, a par value of C$50 million, and a coupon rate of 12
Bulldog Bank has just purchased bonds for $106 million that have a par value of $100 million, three years remaining to maturity, and an annual coupon rate of 14 percent. It expects the required rate
Sun Devil Savings has just purchased bonds for $38 million that have a par value of $40 million, five years remaining to maturity, and a coupon rate of 12 percent. It expects the required rate of
Spartan Insurance Company plans to purchase bonds today that have four years remaining to maturity, a par value of $60 million, and a coupon rate of 10 percent. Spartan expects that in three years,
Hankla Company plans to purchase either (1) zero-coupon bonds that have ten years to maturity, a par value of $100 million, and a purchase price of $40 million, or (2) bonds with similar default
The portfolio manager of Ludwig Company has excess cash that is to be invested for four years. He can purchase four-year Treasury notes that offer a 9 percent yield. Alternatively, he can purchase
Distinguish between FHA and conventional mortgages.
Describe the factors that affect mortgage prices.
Explain why some financial institutions prefer to sell the mortgages they originate.
Compare the secondary market activity for mortgages to the activity for other capital market instruments (such as stocks and bonds). Provide a general explanation for the difference in the activity
Explain how a mortgage company's degree of exposure to interest rate risk differs from other financial institutions.
Describe how mortgage-backed securities are used.
Explain how the maturity on mortgage-backed securities can be affected by interest rate movements.
What is the general relationship between mortgage rates and long-term government security rates? Explain how mortgage lenders can be affected by interest rate movements. Also explain how they can
Explain subprime mortgages. Why were mortgage companies aggressively offering subprime mortgages?
How did the repayment of subprime mortgages compare to that of prime mortgages during the credit crisis?
Explain the problems in valuing MBS.
Explain how the credit crisis adversely affected many other people beyond homeowners and mortgage companies.
Many investors that purchased the mortgage-backed securities just before the credit crisis believed that they were misled, because these securities were riskier than they thought. Who is at fault?
Do you think that the U.S. financial system will be able to avoid a credit crisis like this in the future?
How does the initial rate on adjustable rate mortgages (ARMs) differ from the rate on fixed-rate mortgages? Why? Explain how caps on ARMs can affect a financial institution's exposure to interest
The U.S. Treasury attempted to resolve the credit crisis by establishing a plan to buy mortgage-backed securities held by financial institutions. Explain how the plan could improve the situation for
Explain why mortgage originators have been criticized for their behavior during the credit crisis. Should other participants in the mortgage securitization process have recognized that lack of
Explain short sales in the mortgage markets. Are short sales fair to homeowners? Are they fair to mortgage lenders?
The government intervened in order to resolve problems in the mortgage markets during the credit crisis. Summarize the advantages and disadvantages of the government intervention during the credit
Explain how the Dodd-Frank Act of 2010 attempted to prevent biased ratings of mortgage-backed securities by credit rating agencies.
Why is the 15-year mortgage attractive to homeowners? Is the interest rate risk to the financial institution higher for a 15-year or a 30-year mortgage? Why?
Explain the use of a balloon-payment mortgage. Why might a financial institution prefer to offer this type of mortgage?
Describe the graduated-payment mortgage. What type of homeowners would prefer this type of mortgage?
Describe the growing-equity mortgage. How does it differ from a graduated-payment mortgage?
Why are second mortgages offered by some home sellers?
Describe the shared-appreciation mortgage.
Many critics argue that greed in the mortgage markets caused the credit crisis. Yet, many market advocates suggest that greed is good, as the thirst for profits by firms that participate in mortgage
a. What macroeconomic factors could affect interest rates and therefore affect the mortgage refinancing decision? b. If Carson refinances its mortgage, it also must decide on the size of a down
a. Given your expectations, would IOs or POs be a better investment? b. Given the situation, is there any reason why you might not purchase the class of CMOs that you selected in the previous
a. "If interest rates continue to decline, the interest-only CMOs will take a hit." b. "Estimating the proper value of CMOs is like estimating the proper value of a baseball player; the proper value
Explain the rights of common stockholders that are not available to other individuals.
Explain why the stock price of a firm may rise when the firm announces that it is repurchasing its shares.
Describe how the interaction between buyers and sellers affects the market value of a firm, and explain how that value can subject a firm to the market for corporate control.
Explain how ADRs enable U.S. investors to become part owners of foreign companies.
How have international mutual funds (IMFs) increased the international integration of capital markets among countries?
Describe spinning and laddering in the IPO market. How do you think these actions influence the price of a newly issued stock? Who is adversely affected as a result of these actions?
How do you think accounting irregularities affect the pricing of corporate stock in general? From an investor's viewpoint, how do you think the information used to price stocks changes in response to
What is the danger of issuing too much stock? What is the role of the securities firm that serves as the underwriter, and how can it ensure that the firm does not issue too much stock?
Briefly describe the provisions of the Sarbanes-Oxley Act. Discuss how this act affects the monitoring by shareholders.
Denton Co. plans to engage in an IPO and will issue 4 million shares of stock. It is hoping to sell the shares for an offer price of $14. It hires a securities firm, which suggests that the offer
Explain how shareholder protection varies among countries. Explain how enforcement of securities laws varies among countries. Why do these characteristics affect the valuations of stocks?
Describe international ETFs, and explain how ETFs are exposed to exchange rate risk. How do you think an investor decides whether to purchase an ETF representing Japan, Spain, or some other country?

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