Exam 2

Question 1

Analyzed via bond ratings or financial analysis
Often expressed as a spread to Treasury yields
Basked on repayment capacity and risk of default

Answer 1

Credit Risk

Question 2

Measured by duration (sensitivity)
Function of maturity
Impacted by embedded options

Answer 2

Interest Rate Risk

Question 3

Weighted average time before bondholders receive cash flows on bond. “Breakeven Point” or the point at which the returns from the bond equals the cost. Immunization is a risk-mitigation strategy that matches the duration of assets and liabilities, minimizing the impact of interest rates over time.

Answer 3

Macaulay Duration

Question 4

Macaulay Duration

Answer 4

=(Sum of PV of EACH cash flow multiplied by time (in years))/(Sum of present value of ALL cash flows

Question 5

a. Average cash-weighted term to maturity. It is also measured in years and %. As interest rates increase (previously issued) bond price will go down. It is used to measure price-sensitivity of a bond to changes in interest rates.

Answer 5

Modified Duration

Question 6

The percent change in price equals Modified Duration times the change in market interest rates

Answer 6

Modified Duration to measure price sensitivity

Question 7

If a bond’s coupon rate is equal to its yield, its price equals its face value;

Answer 7

Par bond

Question 8

If a bond’s coupon rate is less than its yield, its price is less than its face value

Answer 8

Discount bond

Question 9

If a bond’s coupon rate is greater than its yield, its price is greater than its face value

Answer 9

Premium bond

Question 10

is a reference rate used in setting rates for adjustable rate mortgages, asset-backed securities, municipal bonds, Credit Default Swaps, student loans

Answer 10

LIBOR

Question 11

Complicated: Loans worth more than $3 trillion use Libor in US and over $200 trillion derivatives contracts use

Answer 11

LIBOR

Question 12

Secured Overnight Financing Rate: Rate that investors pay for overnight lending in Repo market collateralize by US Treasury bills

Answer 12

LIBOR

Question 13

Net Realizable Value= est. selling price – any cost to complete and sell the goods.
If NRV is lower, an “Inventory Write-down” can occur. Write-downs go through I/S

Answer 13

Inventory

Question 14

COGS will be lower
Income will be higher
NI, TAXES HIGHER

Answer 14

FIFO

Question 15

COGS will reflect market prices
Inventory will be lower
Income will be lower --> taxes will be lower -->cash flow will be higher
COGS AND CF HIGHER
IMPACTS CASH FLOW due to TAX IMPACT

Answer 15

LIFO

Question 16

To adjust LIFO inventory level to FIFO inventory level, _______

Answer 16

ADD the LIFO reserve

Question 17

FIFO inventory =

Answer 17

LIFO inventory + LIFO reserve

Question 18

To adjust Cost of Goods Sold, ___

Answer 18

Use the change in LIFO reserve

Question 19

Which inventory method results in a more accurate income statement?

Answer 19

LIFO

Question 20

Which inventory method results in a more accurate balance sheet

Answer 20

FIFO

Question 21

Which inventory method is not allowed by IFRS?

Answer 21

LIFO

Question 22

If a company’s LIFO reserve increases, what effect, if any, will it have on FIFO Net Income?

a. FIFO_____
b. LIFO_____
c. COGS _____
d. FIFO net Up or Down?

Answer 22

a. FIFO net income would be higher than reported under LIFO
b. LIFO reserve UP
c. COGS DOWN
d. FIFO net income UP

Question 23

Long term assets are funded with

Answer 23

Long-term liabilities

Question 24

Short term assets are funded with

Answer 24

short- term liabilities

Question 25

Two major forms of commercail bank borrowing

Answer 25

a. commercial | b. debt

Question 26

Typically Inventory and/or AR

Answer 26

Borrowing Base

Question 27

To place on balance sheet as an asset

Answer 27

Capitalize

Question 28

Capitalization _____ current income, but ______ future income

Answer 28

increases, decreases

Question 29

At acquisition, capitalize ____ and ____

Answer 29

purchase price and expenditures

Question 30

Subsequent expenditures are capatalized if _____ or _____ otherwise

Answer 30

expected to provide benefits beyond one year or expensed otherwise

Question 31

Acquisition of Intangible Assets when a. purchased individually b. developed internally c. acquired in business combination

Answer 31

a. recorded at fair value b. generally expensed when occurred c. recorded at fair value

Question 32

Capitalizing project cost longer results in ____ profitability ratios in the first year and _____ profitability ratios in subsequent years

Answer 32

higher, lower

Question 33

At what point can software development costs be capitalized? a. Software For Sale Externally: b. Sorftware for internal use

Answer 33

a. after technologically feasible | b. after completion in probable

Question 34

What aspects of acquired long-term assets are capitalized?

Answer 34

purchase price and expenditures necessary to prepare asset for use

Question 35

What parts of subsequent expenditures on long-lived assets are capitalized

Answer 35

Expected to provide benefits beyond one year

Question 36

Depreciation _____ asset values over time

Answer 36

decreases

Question 37

Writes asset values down at a single point in time and reflects unanticipated declines in values

Answer 37

impairment

Question 38

Accelerating depreciation expense early on in an asset’s life will _____ expenses earlier and ____ them in later years

Answer 38

increase, decrease

Question 39

Effects of Accelerated Depreciation | Higher/Lower Net Income in early years?

Answer 39

LOWER due to depreciation being higher

Question 40

Effects of Accelerated Depreciation | Higher/Lower Net Assets in early years?

Answer 40

LOWER due to accumulated depreciation being higher

Question 41

Effects of Accelerated Depreciation | Higher/Lower Equity Balance in early years?

Answer 41

LOWER because retained earnings will be affected by lower net income

Question 42

Effects of Accelerated Depreciation | Higher/Lower Asset turnover in early years?

Answer 42

HIGHER because average assets are lower

Question 43

Effects of Accelerated Depreciation | Higher/Lower EBITDA in earlier years?

Answer 43

Depreciation doesn't affect EBITDA

Question 44

Useful Life =

Answer 44

Historical cost/Annual depreciation expense

Question 45

Estimated Age =

Answer 45

Accumulated depreciation/Annual depreciation expense

Question 46

Remaining Life =

Answer 46

Net PP&E/Annual depreciation expense

Question 47

_____ differences between accounting profit and taxable income give rise to deferred tax assets and/or liabilities

Answer 47

Temporary

Question 48

________ Differences between accounting profit and taxable income DO NOT give rise to a deferred tax asset or liability

Answer 48

Permanent