Exam 2 Flashcards
Analyzed via bond ratings or financial analysis
Often expressed as a spread to Treasury yields
Basked on repayment capacity and risk of default
Credit Risk
Measured by duration (sensitivity)
Function of maturity
Impacted by embedded options
Interest Rate Risk
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.
Macaulay Duration
Macaulay Duration
=(Sum of PV of EACH cash flow multiplied by time (in years))/(Sum of present value of ALL cash flows
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.
Modified Duration
The percent change in price equals Modified Duration times the change in market interest rates
Modified Duration to measure price sensitivity
If a bond’s coupon rate is equal to its yield, its price equals its face value;
Par bond
If a bond’s coupon rate is less than its yield, its price is less than its face value
Discount bond
If a bond’s coupon rate is greater than its yield, its price is greater than its face value
Premium bond
is a reference rate used in setting rates for adjustable rate mortgages, asset-backed securities, municipal bonds, Credit Default Swaps, student loans
LIBOR
Complicated: Loans worth more than $3 trillion use Libor in US and over $200 trillion derivatives contracts use
LIBOR
Secured Overnight Financing Rate: Rate that investors pay for overnight lending in Repo market collateralize by US Treasury bills
LIBOR
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
Inventory
COGS will be lower
Income will be higher
NI, TAXES HIGHER
FIFO
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
LIFO
To adjust LIFO inventory level to FIFO inventory level, _______
ADD the LIFO reserve
FIFO inventory =
LIFO inventory + LIFO reserve
To adjust Cost of Goods Sold, ___
Use the change in LIFO reserve
Which inventory method results in a more accurate income statement?
LIFO
Which inventory method results in a more accurate balance sheet
FIFO
Which inventory method is not allowed by IFRS?
LIFO
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?
a. FIFO net income would be higher than reported under LIFO
b. LIFO reserve UP
c. COGS DOWN
d. FIFO net income UP
Long term assets are funded with
Long-term liabilities
Short term assets are funded with
short- term liabilities
Two major forms of commercail bank borrowing
a. commercial
b. debt
Typically Inventory and/or AR
Borrowing Base
To place on balance sheet as an asset
Capitalize
Capitalization _____ current income, but ______ future income
increases, decreases
At acquisition, capitalize ____ and ____
purchase price and expenditures
Subsequent expenditures are capatalized if _____ or _____ otherwise
expected to provide benefits beyond one year or expensed otherwise
Acquisition of Intangible Assets when
a. purchased individually
b. developed internally
c. acquired in business combination
a. recorded at fair value
b. generally expensed when occurred
c. recorded at fair value
Capitalizing project cost longer results in ____ profitability ratios in the first year and _____ profitability ratios in subsequent years
higher, lower
At what point can software development costs be capitalized?
a. Software For Sale Externally:
b. Sorftware for internal use
a. after technologically feasible
b. after completion in probable
What aspects of acquired long-term assets are capitalized?
purchase price and expenditures necessary to prepare asset for use
What parts of subsequent expenditures on long-lived assets are capitalized
Expected to provide benefits beyond one year
Depreciation _____ asset values over time
decreases
Writes asset values down at a single point in time and reflects unanticipated declines in values
impairment
Accelerating depreciation expense early on in an asset’s life will _____ expenses earlier and ____ them in later years
increase, decrease
Effects of Accelerated Depreciation
Higher/Lower Net Income in early years?
LOWER due to depreciation being higher
Effects of Accelerated Depreciation
Higher/Lower Net Assets in early years?
LOWER due to accumulated depreciation being higher
Effects of Accelerated Depreciation
Higher/Lower Equity Balance in early years?
LOWER because retained earnings will be affected by lower net income
Effects of Accelerated Depreciation
Higher/Lower Asset turnover in early years?
HIGHER because average assets are lower
Effects of Accelerated Depreciation
Higher/Lower EBITDA in earlier years?
Depreciation doesn’t affect EBITDA
Useful Life =
Historical cost/Annual depreciation expense
Estimated Age =
Accumulated depreciation/Annual depreciation expense
Remaining Life =
Net PP&E/Annual depreciation expense
_____ differences between accounting profit and taxable income give rise to deferred tax assets and/or liabilities
Temporary
________ Differences between accounting profit and taxable income DO NOT give rise to a deferred tax asset or liability
Permanent
