1. The real risk-free rate (r*) is 2.80% and is expected to remain constant into the future. Inflation is expected to be 6.80% per year for each of the next two years and 5.60% thereafter.The maturity risk premium (MRP) is determined from the formula: 0.10 x (t – 1)%, where t is the security’s maturity. The liquidity premium (LP) on all National Transmissions Corp.’s bonds is 1.20%. The following table shows the current relationship between bond ratings and default risk premiums (DRP):

Rating

Default Risk Premium

U.S. Treasury —
AAA 0.60%
AA 0.80%
A 1.05%
BBB 1.45%
National Transmissions Corp. issues thirteen-year, AA-rated bonds. What is the yield on one of these bonds? (Hint: Disregard cross-product terms; that is, if averaging is required, use an arithmetic average.)

10.58%

11.78%

6.00%

2. Based on your understanding of the determinants of interest rates, if everything else remains the same, which of the following will be true?

A) The yield on a AAA-rated bond will be lower than the yield on a AA-rated bond.

B) The yield on a AAA-rated bond will be higher than the yield on a BB-rated bond.

Answers

Answer 1

Answer:

Answer:

Answer for the question:

"1. The real risk-free rate (r*) is 2.80% and is expected to remain constant into the future. Inflation is expected to be 6.80% per year for each of the next two years and 5.60% thereafter.

The maturity risk premium (MRP) is determined from the formula: 0.10 x (t – 1)%, where t is the security’s maturity. The liquidity premium (LP) on all National Transmissions Corp.’s bonds is 1.20%. The following table shows the current relationship between bond ratings and default risk premiums (DRP):

Rating

Default Risk Premium

U.S. Treasury —

AAA 0.60%

AA 0.80%

A 1.05%

BBB 1.45%

National Transmissions Corp. issues thirteen-year, AA-rated bonds. What is the yield on one of these bonds? (Hint: Disregard cross-product terms; that is, if averaging is required, use an arithmetic average.)

10.58%

11.78%

6.00%

2. Based on your understanding of the determinants of interest rates, if everything else remains the same, which of the following will be true?

A) The yield on a AAA-rated bond will be lower than the yield on a AA-rated bond.

B) The yield on a AAA-rated bond will be higher than the yield on a BB-rated bond."

is explained in the attachment.

Explanation:

Answer 2

Answer:

Final answer:

The yield on National Transmissions Corp.'s thirteen-year, AA-rated bond is 12.20%. Additionally, a AAA-rated bond will have a lower yield than a AA-rated bond due to lower default risk.

Explanation:

To calculate the yield on the bond, we take into account the real risk-free rate (r*), the inflation rate, the default risk premium (DRP), the maturity risk premium (MRP), and the liquidity premium (LP). Note that the inflation rate is given for two different periods, so we take the average of the two (6.80% and 5.60%).

The formula to calculate yield is: r = r* + Inflation rate + MRP + DRP + LP

Real risk-free rate (r*) = 2.80%
Inflation rate (average) = (6.80% + 5.60%) / 2 = 6.20%
Maturity Risk Premium (MRP) = 0.10 x (13 – 1)% = 1.20%
Default Risk Premium (DRP) for AA-rated bond = 0.80%
Liquidity Premium (LP) = 1.20%

Hence, the yield on the bond = 2.80% + 6.20% + 1.20% + 0.80% + 1.20% = 12.20%.

For part 2 of the question, the statement A) is correct. The yield of a AAA-rated bond will be lower than that of a AA-rated bond because the default risk of AAA-rated bond is less, hence a lower default risk premium is required.

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If the unemployment rate falls below its long-run level, which policies would be appropriate to stabilize output? a. increase the money supply, increase taxes b. increase the money supply, cut taxes c. decrease the money supply, increase taxes d. decrease the money supply, cut taxes

Answers

Answer:

c. decrease the money supply, increase taxes

Explanation:

Unemployment rate lower than the natural rate of unemployment (long run unemployment), creates inflationary gap in the economy. It requires policies to be contractionary in nature. Hence, money supply should decrease and tax should increase to correct the economy.

"Every individual necessarily labors to render the annual revenue of the society as great as he can. He generally indeed neither intends to promote the public interest, nor knows how much he is promoting it. He intends only his own gain, and he is in this, as in many other cases, led by an invisible hand to promote an end which was no part of his intention. By pursuing his own interest he frequently promotes that of the society more effectually than when he really intends to promote it. I have never known much good done by those who affected to trade for the public good." – Adam Smith what this quote means

Answers

Answer:

This quote highlights Adam Smith - Self Interest, Free Reign, Invisible Hand theories

Explanation:

Adam Smith is the Father of Economics.

His self interest theory states that : Individuals working for the best of self interest implies maximum welfare for society as a whole.

Hence, the free reign idea suggests that people as 'self interest' guided rational economic agents should be left free. The invisible hand of market restores any distortions.

Government intervention is considered to be not only unnecessary, but distortionary.

A firm's current profits are $1,400,000. These profits are expected to grow indefinitely at a constant annual rate of 4 percent. If the firm's opportunity cost of funds is 7 percent, determine the value of the firm: Instructions: Enter your responses rounded to two decimal places. a. The instant before it pays out current profits as dividends. $ 49933333.33 million b. The instant after it pays out current profits as dividends.

Answers

Answer:

a. $49,933,333.33 million

b. $48,533,333.33 million

Explanation:

The computations are presented below:

a. For current profits as dividends in before case

= Profits × (1 + opportunity cost) ÷ (opportunity cost - growth rate)

= $1,400,000 × (1 + 0.07) ÷ (0.07 - 0.04)

= $1,400,000 × 35.6666

= $49,933,333.33 million

b. For current profits as dividends in after case

= Profits × (1 + growth rate) ÷ (opportunity cost - growth rate)

= $1,400,000 × (1 + 0.04) ÷ (0.07 - 0.04)

= $1,400,000 × 34.6666

= $48,533,333.33 million

Final answer:

Using the Gordon growth model, the value of the firm before dividend payouts is calculated to be $49,933,333.33. However, instantly after the dividend payouts, the firm's value becomes zero.

Explanation:

The value of the firm can be determined using the Gordon growth model, which is used to determine the value of a firm or stock that pays dividends that are expected to grow at a constant rate. In such a scenario, the firm's value is equal to the dividends of the next period (D1) divided by the required rate of return minus the growth rate of dividends.

Part A: The firm's value, before the payouts, can be calculated as:

Value = D0 * (1+g) / (k-g) = $1,400,000 * (1+0.04) / (0.07-0.04) = $49,933,333.33

Part B: The firm's value, after payouts, assumes that the firm's capital has come back to the company and will start accumulating again once the next cycle begins. Thus the firm's value would become zero.

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Seller in Georgia and buyer in the Netherlands enter into a contract for the sale of goods, CIF port of Amsterdam. The seller refused to ship. The buyer brings an action for damages. In the US, a court would probably rule

Answers

Answer: b.

damages should be measured by the difference between the contract price and the market price of the goods at the port of shipment

Explanation: Because the contract has already been initiated and was defaulted by the seller. The Judge would ask him to pay for damages. And this will be measured by subtracting the contract price of the goods from the market price. I.e the price the goods would gave been sold and the price the seller accepted to sell to the buyer according to the contract they signed.

Ayayai Corp. lends Martinez industries $48000 on August 1, 2022, accepting a 9-month, 6% interest note. If Ayayai Corp. accrued interest at its December 31, 2022 year-end, what entry must it make to record the collection of the note and interest at its maturity date

Answers

Final answer:

To record the collection of the note and interest at its maturity, Ayayai Corp. first must calculate and record the accrued interest at the year-end, and then upon maturity, record the collection of the total amount received and credit the Notes Receivable and Interest Revenue.

Explanation:

The first step is to calculate the accrued interest on December 31, 2022. The note was issued on August 1, so the time period until December 31 is 5 months. To calculate the accrued interest, use the formula principal x interest rate x time (in years).

For our case: $48000 x 0.06 x (5/12) = $1200. So, Ayayai Corp. must record an accrual of $1,200 in interest receivable on December 31, 2022. This is done with a debit to Interest Receivable and a credit to Interest Revenue.

When the note matures 9 months from August 1, which will be in May 2023, both the principal and the full interest are due. The interest for 9 months would be $48000 * 0.06 * (9/12) = $2160. Thus, upon collection, Ayayai would debit Cash for the total amount received (principal + full interest), debit Interest Receivable for $1200, credit Notes Receivable for the principal amount, and credit Interest Revenue for the remaining $960.

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This is currently the right answer . Lolll

Ribb Corporation produces and sells a single product. Data concerning that product appear below: Per Unit Percent of Sales Selling Price $190 100% Variable Expenses 57 30% Contribution Margin $133 70% Fixed expenses are $913,000 per month. The company is currently selling 9,000 units per month. Management is considering using a new component that would increase the unit variable cost by $6. Since the new component would increase the features of the company's product, the marketing manager predicts that monthly sales would increase by 400 units. What should be the overall effect on the company's monthly net operating income of this change?