At the beginning of year 1, Unbalanced Bank makes a three-year, fixed-rate loan to Butterfly Corp. Butterfly
Question:
At the beginning of year 1, Unbalanced Bank makes a three-year, fixed-rate loan to Butterfly Corp. Butterfly promises to repay Unbalanced in three installments of $100 each year at the ends of years 1, 2, and 3. The initial market interest rate is 6% at the time of issuance. The market rate falls to 4% at the end of year 1 and rises to 5% at the end of year 2.
Also at the beginning of year 1, Unbalanced finances this loan asset by issuing a three-year, floating-rate, annual paying bond liability at the beginning of year 1. The initial coupon rate on the bond is 6%. The floating rate changes to the market rate 4% at the end of year 1 and 5% at the end of year 2. Unbalanced promises to pay the coupon payments at the ends of years 1, 2, and 3 and the face value at the end of year 3.
Managerial Accounting
ISBN: 9780073526706
12th Edition
Authors: Ray H. Garrison, Eric W. Noreen, Peter C. Brewer