Ryan Marie Company has one asset, a bond issued by Miles Company that Ryan Marie purchased (on the day it was issued) as an investment. Ryan Marie also has only one liability, one of its own bonds that was to finance the purchase of the Miles Bond investment. The company had no initial shareholder investment. Both bonds have the same terms: $1,000 face value, 10-year life, 11% coupon rate, and single interest payments made at the end of each year. On their issuance dates, both bonds were associated with a market interest rate of 8%. The company has determined to account for both the bond asset and the bond liability using the fair value option.
1. Prepare a balance sheet for Ryan Marie Company as of the date it both purchased the Miles bond investment and issued its own bonds payable.
2. On the very next day, the market interest rate with respect to the Miles bond investment had risen to 13%, and the market interest rate with respect to Ryan Marie’s bond had risen to 11%. Prepare the company’s balance sheet.
3. Repeat (2) but this time assume that the market interest rate for the Miles bond had gone down to 6%, and the market interest rate of the Ryan Marie bond had increased to 14%.
4. Repeat (2) but this time assume that the market interest rate for the Miles bond had increased to 14%, and the market interest rate of the Ryan Marie bond had gone down to 6%.