Answer:
Miller Company
The actual interest for Miller Company is:
= $4,688,000.
Explanation:
a) Data and Calculations:
Expenditures:
March 1 $12,800,000
June 1 $10,560,000
Dec. 31 $16,000,000
Notes Payable: Amount Actual Interest
January 1: 5-year, 12% Construction Loan = $6,400,000 $768,000
Year's: 3-year, 10% Note Payable = 12,800,000 1,280,000
Year's: 4-year, 11% Note Payable = 24,000,000 2,640,000
Total $43,200,000 $4,688,000
Alieia Boat Company manufactures 10 luxury yachts per month. A navigation system is included in each yacht. Alieia Boat manufactures the navigation system in-house but is considering the possibility of outsourcing this function. At present, the variable cost per unit is $300, and the fixed costs are $38,000 per month. If it outsources the security system, fixed costs could be reduced by half, and the vacant facilities could be rented out to earn $3000 per month of rental income. What is the maximum contract cost that Alieia should pay for outsourcing?
a) any cost lower than $2500 per unit
b) any cost lower than $2200 per unit
c) any cost lower than $300 per unit
d) any cost lower than $3800 per unit
Answer:
a) any cost lower than $2500 per unit
Explanation:
total avoidable costs = ($300 * 10) + ($38,000 / 2) + $3,000 = $25,000
total number of navigation systems prodcued per month = 10
avoidable cost per navigation system = $25,000 / 10 = $2,500
this means that th e comapny could pay up to $2,500 per navigtion system provided by an extrenal supplier
An electronics company makes communications devices for military contracts. The company just completed two contracts. The navy contract was for 2,540 devices and took 27 workers two weeks (40 hours per week) to complete. The army contract was for 5,940 devices that were produced by 37 workers in three weeks (40 hours per week). a. Calculate the productivity for navy and army contracts in units produced per labor hour.
Answer:
Explanation:
For Navy contract, the total number of man hours put into production will be:
= 27 × 40 × 2
= 2160 man hours
Then, the units produced per labor hour will be:
= 2540 devices / 2160
= 1.176 units per labor hour.
For Army contracts, the total number of man hours put into production will be:
= 37 × 40 × 3
= 4440 man hours
Then, the units produced per labor hour will be:
= 5940/4440
= 1.338 units per labor hour.
The short-run average total cost (ATC) curve of a firm will tend to be U-shaped because Group of answer choices larger firms always have lower per-unit costs than smaller firms. at low levels of output, AFC will be high, while at high levels of output, MC will be high as the result of diminishing returns. diminishing returns will be present when output is small, and high AFC will push per-unit cost to high levels when output is large. diseconomies of scale will be present at both small and large output rates.
Answer:
at low levels of output, AFC will be high, while at high levels of output, MC will be high as the result of diminishing returns.
Explanation:
In Economics, the law of diminishing marginal utility states that as the unit of a good or service consumed by an individual increases, the additional satisfaction he or she derives from consuming additional units would start decreasing or diminishing as the units of good or service consumed increases.
The short-run average total cost (ATC) curve of a firm will tend to be U-shaped because at low levels of output, average fixed cost (AFC) will be high, while at high levels of output, marginal cost (MC) will be high as the result of diminishing returns.
This ultimately implies that, the average fixed cost (AFC) will be high at small (low-level) output rates while marginal cost (MC) will be high at large (high-level) output rates due to diminishing marginal returns.
As a result of the law of diminishing marginal returns, a business firm would experience some rising per unit costs in the short-run.
In conclusion, an increase in the level of output for a business firm will eventually lead to an increase in average total cost (ATC) and marginal cost (MC) due to the law of diminishing marginal returns.
principal, $3000 × annual interest rate, 5/2% × years,7/2
Answer:
$262.5
Explanation:
p=$3000
R=5/2%
T=7/2 years
hence ,
interest= p×t×r/100
= (3000×5/2×7/2)/100
= (30×35/4)
= (7.5 × 35)
=$262.5
On the first day of its fiscal year, Ebert Company issued $50,000,000 of 10-year, 7% bonds to finance its operations. Interest is payable semiannually. The bonds were issued at a market (effective) interest rate of 9%, resulting in Ebert receiving cash of $43,495,895. The company uses the interest method.
a. Journalize the entries to record the following:
1. sale of the bonds.
2. First semiannual interest payment, including amortization of discount.
3. Second semiannual interest payment, including a of discount.
b. Compute the amount of the bond interest expense for the first year.
c. Explain why the company was able to issue the bonds for only $43,495, 895 rather than for the face amount of $50,000,000.
Answer:
Ebert Company
Journal Entries:
1) Debit Cash $43,495,895
Debit Bonds Discounts $6,504,105
Credit Bonds Payable $50,000,000
To record the sale of the bonds at a discount.
2) First semiannual interest payment:
Debit Interest Expense $1,957,315
Credit Amortization $207,315
Credit Cash $1,750,000
To record the first semiannual interest payment.
3) Second semiannual interest payment:
Debit Interest Expense $1,966,644
Credit Amortization $216,644
Credit Cash $1,750,000
To record the second semiannual interest payment.
b. Bond interest for the first year = $3,923,959 ($1,957,315 + $1,966,644)
c. The company issued the bonds at a discount at a coupon rate of 7%, which is less than the market interest rate of the bonds (9%).
Explanation:
a) Data and Calculations:
Face value of bonds = $50,000,000
Price received = $43,495,895
Discount = $6,504,105
Coupon interest rate = 7%
Interest payment = semiannually
Maturity period = 10 years
Market (effective) interest rate = 9%
1) Cash $43,495,895 Bonds Discounts $6,504,105 Bonds Payable $50,000,000
2) First semiannual interest payment:
Interest Expense $1,957,315 Amortization $207,315 Cash $1,750,000
Cash payment = $1,750,000 ($50,000,000 * 3.5%)
Interest expense = 1,957,315 ($43,495,895 * 4.5%)
Amortization = $207,315
Fair value of bonds = $43,703,210 ($43,495,895 + $207,315)
3) Second semiannual interest payment:
Interest Expense $1,966,644 Amortization $216,644 Cash $1,750,000
Cash payment = $1,750,000 ($50,000,000 * 3.5%)
Interest expense = 1,966,644 ($43,703,210 * 4.5%)
Amortization = $216,644
Marble Books, Inc., is expected to pay an annual dividend of $1.80 per share next year. The required return is 16 percent and the growth rate is 4 percent. What is the expected value of this stock five years from now
Answer:
$18.25
Explanation:
Calculation to determine the expected value of this stock five years from now
Expected value= 2.19/(0.16-0.04)
Expected value= 2.19/0.12
Expected value =$18.25
Therefore the expected value of this stock five years from now is $18.25
Ayayai Corp. redeemed $158,000 face value, 12% bonds on April 30, 2022, at 102. The carrying value of the bonds at the redemption date was $142,674. The bonds pay annual interest, and the interest payment due on April 30, 2022, has been made and recorded.
Required:
Prepare the appropriate journal entry for the redemption of the bonds.
Answer and Explanation:
The journal entries are given below:
On 30-Apr
Bond Payable [$158,000] 158,000
Loss on Bond redemption [$161,160 - $142,674] 18,486
Discount on bonds payable 15,326
Cash [$158,000 × 102%] 161,160
[being the redemption of the Bond is recorded]
Here the bond payable and loss is debited as it decreased the assets and increased the losses and credited the cash & discount on bond payable
A firm sells two products, Regular and Ultra. For every unit of Regular sold, two units of Ultra are sold. The firm's total fixed costs are $1,782,000. Selling prices and cost information for both products follow. The contribution margin per composite unit is:
Answer:
Total Contribution = $52
Explanation:
Given:
Fixed cost = $1,782,000
Product Sales price VC per unit
Regular $20 $8
Ultra $24 $4
Computation:
Contribution = Sales - VC
Contribution on regular product = 20 - 8 = $12
Contribution on ultra product = 24 - 4 = $20
Total Contribution = (1 x 12) + (2 x 20)
Total Contribution = 12 + 40
Total Contribution = $52
A retail store had sales of $44,900 in April and $55,000 in May. The store employs eight full-time workers who work a 40-hour week. In April the store also had eight part-time workers at 12 hours per week, and in May the store had eleven part-timers at 17 hours per week (assume four weeks in each month). Using sales dollars as the measure of output, what is the percentage change in productivity (dollars output per labor hour) from April to May
Answer:
0.52%
Explanation:
Productivity in April = $44,900 / (((8*40) + (8*12)) * 4)
Productivity in April = $44,900 / ((320 + 96) * 4)
Productivity in April = $44,900 / (416 * 4)
Productivity in April = $44,900 / 1664 hours
Productivity in April = $26.98 per hour
Productivity in May = $55,000 / (((8*40) + (11*17)) * 4)
Productivity in May = $55,000 / ((320 + 187) * 4)
Productivity in May = $55,000 / (507 * 4)
Productivity in May = $55,000 / 2028 hours
Productivity in May = $27.12 per hour
% increase in productivity per hour = ($27.12 - $26.98) / $26.98
% increase in productivity per hour = $0.14 / $26.98
% increase in productivity per hour = 0.0052
% increase in productivity per hour = 0.52%
Lennon, Inc. is considering a five-year project that has an initial outlay or cost of $80,000. The respective future cash inflows from its project for years 1, 2, 3, 4 and 5 are: $15,000, $25,000, $35,000, $45,000, and $55,000. Lennon uses the internal rate of return method to evaluate projects. What is Lennon's IRR
Answer:
26.16%
Explanation:
Internal rate of return is the discount rate that equates the after-tax cash flows from an investment to the amount invested
IRR can be determined using a financial calculator
CO = -80,000
C1 = $15,000
C2 = $25,000
C3 = $35,000,
C4 = $45,000
C 5 = 55,000
IRR = 26.16
To determine IRR using a financial calculator:
1. Input the cash flow values by pressing the CF button. After inputting the value, press enter and the arrow facing a downward direction.
2. After inputting all the cash flows, press the IRR button and then press the compute button.
The net income of a company for the year was $500,000. The company has no preferred stock. Common stockholders' equity was $1,200,000 at the beginning of the year and $2,500,000 at the end of the year. Calculate the rate of return on common stockholders' equity.
Answer:
27.03%
Explanation:
Average common stockholders' equity = (1,200,000+2,500,000) / 2
Average common stockholders' equity = $3,700,000 / 2
Average common stockholders' equity = $1,850,000
Rate of return on common stockholders' equity = Net Income / Average common stockholders' equity
Rate of return on common stockholders' equity = $500,000 / $1,850,000
Rate of return on common stockholders' equity = 0.27027
Rate of return on common stockholders' equity = 27.03%
PET Co. owns 80% of the common shares of SAL Corp. PET has no other investments. Goodwill associated with the investment is nil, but there is a fair value increment of $62,500 relating to SAL's patent that is being amortized over 10 years. PET's and SAL's reported net income for 20X5 is as follows: PET Co. SAL Corp. Net income $200,000 $50,000 SAL declared $25,000 in dividends in 20X5. Assuming PET uses the cost method, what amount of consolidated net income attributable to the parent (ATP) would be reported in 20X5?
a) $210,000
b) $215,000
c) $223,750
d) $235,000
Fill in the blanks with the category of the expanded accounting equation (assets, liabilities, stockholders' equity, dividends, revenues, expenses). Check your spelling carefully and do not abbreviate.
Inventory Retained Earnings
Dividends Cost of Goods Sold
Utilities Payable Service Revenue
Accounts Payable Rent Expense
Answer:
a. Inventory: Assets
b. Dividends: Dividends
c. Utilities Payable: Liabilities
d. Accounts Payable: Liabilities
e. Retained Earnings: Stockholders' equity
f. Cost of Goods Sold: Expenses
g. Service Revenue: Revenue
h. Rent Expense: Expenses
Explanation:
a. Inventory: Assets
As inventory is owned by the company for the purpose of generating cash, it is considered an asset. They are current assets since they must be sold within a year.
b. Dividends: Dividends
Dividends refer a portion of a company's profits that is paid out to its shareholders.
c. Utilities Payable: Liabilities
Utilities payable are liabilities since they represent utilities that the corporation is yet to settle. Utilities payable are current liabilities item since they have to be paid within a year.
d. Accounts Payable: Liabilities
Amounts owed to vendors or suppliers for products or services received but not yet paid for are referred to as accounts payable. They are current liabilities item since they have to be paid within a year.
e. Retained Earnings: Stockholders' equity
Profits that were not distributed to shareholders are known as retained earnings. However, because they are still owned by the shareholders, they are classified as equity.
f. Cost of Goods Sold: Expenses
The direct costs of manufacturing the goods that a company sells are referred to as COGS. This is an income statement item.
g. Service Revenue: Revenue
The income a corporation earns from providing a service is referred to as service revenue. This is also an income statement item.
h. Rent Expense: Expenses
The cost incurred by a firm to use a property or location for business purposes is referred to as rent expense. Rent Expense is also an income statement item.
Nichols Company uses the percentage of receivables method for recording bad debts expense. The month-end accounts receivable balance is $250,000 and credit sales during the month were $1,000,000. Management estimates that 4% of accounts receivable will be uncollectible. The Allowance for Doubtful Accounts has a credit balance of $2,500 before adjustment. The adjusting entry that Nichols must make includes: a. a credit to the allowance for $7,500. b. a credit to the allowance for $30,000. c. a debit to bad debt expense for $10,000. d. a debit to bad debt expense for $40,000.
Answer: a. a credit to the allowance for $7,500
Explanation:
Estimated Bad Debt = Balance on Account receivable x bad Debt loss rate = $250,000 x 4% = $10,000
Allowance for doubtful accounts with a credit balance of $2,500
Allowance for Bad debts expense =Estimated Bad Debt - Credit balance Allowance for doubtful accounts = $10,000 - $2,500 = $7,500
Account titles and explanation Debit Credit
Bad Debt Expense $7,500
Allowance for Doubtful Accounts $7,500
On November 1, 2021, Vinfast Co. receives $3,600 cash from FPT Co. for consulting services to be provided evenly over the period November 1, 2021, to April 30, 2022—at which time Vinfast credited $3,600 to Unearned Consulting Fees. The adjusting entry on December 31, 2021 would include a
a. Debit to Unearned Consulting Fees for $1,200
b. Debit to Unearned Consulting Fees for $2,400.
c. Credit to Consulting Fees Earned for $2,400.
d. Debit to Consulting Fees Earned for $1,200.
Answer: A. Debit to Unearned Consulting Fees for $1,200
Explanation:
Following the information given in the question, Vinfast Co. receives $3,600 cash from FPT Co. for consulting services to be provided evenly over the period November 1, 2021, to April 30, 2022.
Since we want to know the adjusting entry on December 31, 2021, a period form November 1, 2021 to December 31, 2021 is a period of two months out of the 6 months period. Therefore, the unearned consultancy fee will be:
= $3600 × 2/6
= $1200
Therefore, there'll be a debit to the unearned consulting Fees for $1,200. Also, there'll be a credit to the consulting fees earned account by $1200.
a. Sunland Cosmetics acquired 12% of the 287,500 shares of common stock of Elite Fashion at a total cost of $14 per share on March 18, 2019. On June 30, Elite declared and paid a $80,200 dividend. On December 31, Elite reported net income of $228,100 for the year. At December 31, the market price of Elite Fashion was $16 per share.
b. Culver Inc. obtained significant influence over Kasey Corporation by buying 25% of Kasey's 29,100 outstanding shares of common stock at a total cost of $11 per share on January 1, 2020. On June 15, Kasey declared and paid a cash dividend of $38.500. On December 31, Kasey reported a net income of $122.900 for the year.
Required:
Prepare all the necessary journal entries for 2020 for Culver Inc.
Answer:
Mar 18
Dr Available for sales Securities $4,025,000
Cr Cash $4,025,000
June 30
Dr Cash $9624
Cr Dividend Revenue $9624
Dec-31
Dr Securities Fair value Adjustment $575,000
Cr Unrealised gain or Losss- income$575,000
B. Jan 1
Dr Investment in Culver stock $80,025
Cr Cash $80,025
Jan 15
Dr Cash $9,625
Cr Investment in Culver stock $9,625
Dec, 31
Dr Investment in Culver stock $30,725
Cr Revenue $30,725
Explanation:
Preparation of all the necessary journal entries for 2020 for Culver Inc.
Mar 18
Dr Available for sales Securities $4,025,000
(287,500*$14)
Cr Cash $4,025,000
June 30
Dr Cash $9624
Cr Dividend Revenue $9624
($80,200*12%)
Dec-31
Dr Securities Fair value Adjustment $575,000
Cr Unrealised gain or Losss- income$575,000
[(287,500*($16-$14)]
B. Jan 1
Dr Investment in Culver stock $80,025
(29,100*25%*$11)
Cr Cash $80,025
Jan 15
Dr Cash $9,625
($38,500*25%)
Cr Investment in Culver stock $9,625
Dec, 31
Dr Investment in Culver stock $30,725
($122,900*25%)
Cr Revenue $30,725
Why does the government sometimes use an expansionary fiscal policy?
Explain one situation when you will use these two pricing strategies penetration pricing and skimming prices
Answer:
An electronic news portal that offers one complimentary month for something like a free trial service or an institution that offers a free bank account for 6 months are both instances of penetration pricing.
A pricing technique known as price skimming is establishing a premium charge when other rivals enter the market. For instance, the Playstation 3 was initially priced at $599 in the United States, but has now been lowered to around $200.
Hamasaki Company owns 30% of CDW Corp. stock and has significant influence. Hamasaki received $6,500 in cash dividends from its investment in CDW. The entry to record receipt of these dividends includes a debit to Cash for $6,500 and a credit to Equity Method Investments for $6,500.
a. True
b. False
Answer:
A. True
Explanation:
Account Title Debit Credit
Cash 6500
Investment in CDW Corp. 6500
Historical demand for a product is: DEMAND January 13 February 12 March 16 April 13 May 17 June 16 a. Using a weighted moving average with weights of 0.50 (June), 0.30 (May), and 0.20 (April), find the July forecast
Answer: 15.7 units
Explanation:
July forecast = (Weight of June * Demand in June) + (Weight of May * Demand in May) + (Weight of April * Demand in April)
= (0.5 * 16) + (0.3 * 17) + (0.2 * 13)
= 8 + 5.1 + 2.6
= 15.7 units
On September 1, 2018, Drill Far Company purchased a tract of land for $2,300,000. The land is estimated to have a salvage value or $50,000, a useful life of four years, and contain an estimated 4,234,000 tons of iron ore. The company also purchased equipment to use in the extraction process that cost $220,450. The company plans to abandon the equipment when the ore is completely mined. During 2018, the company extracted and sold 1.25 million tons of ore. What is the depletion expense recorded for 2018
Answer:
$562,500
Explanation:
Depletion expenses = Land expenses
Depletion expenses = [$2,300,000 - $50,000 / 4]
Depletion expenses = $2,250,000 / 4
Depletion expenses = $562500
So, the depletion expense recorded for 2018 is $562,500
Grover contracts to sell two tracts of land to Hank. Both parties believe that the two tracts are adjacent, but in fact they are not. Grover is still willing to sell the land, but under these circumstances the deal would adversely affect Hank. The parties belief about the adjacency of the property is:
Answer:
A bilateral mistake
Explanation:
The mistakes of fact
This simply occurs in two forms. They are:
1. bilateral
2. Unilateral
Unilateral mistake of fact
This is simply said to happen if and only when one party is mistaken. This form of mistake of fact makes contract voidable.
Bilateral Mistake of facts
This form of mistake usually involves both parties. It is simply called a mutual mistake. This is also defined as mutual omissions or misunderstanding on simple assumption on which the contract was made.
Atlanta Company, had an ROA of 6.5 percent, a profit margin of 11.50 percent, and sales $20 million. Calculate Atlanta's total assets. Show your calculation
Answer:
The right solution is "35.39".
Explanation:
Given:
Profit margin,
= 11.50%
or,
= 0.115
ROA,
= 6.5%
or,
= 0.065
Sales,
= $20 million
As we know,
⇒ [tex]Profit \ margin = \frac{Net \ income}{Sales}[/tex]
or,
⇒ [tex]Net \ income = Sales\times Profit \ margin[/tex]
[tex]=20\times 0.115[/tex]
[tex]=2.3[/tex]
hence,
The total asset will be:
⇒ [tex]ROA = \frac{Net \ income}{Total \ assets}[/tex]
or,
⇒ [tex]Total \ assets = \frac{Net \ income}{ROA}[/tex]
[tex]=\frac{2.3}{0.065}[/tex]
[tex]=35.39[/tex]
The direct method of reporting operating cash flows: ________
a. Separately lists cash receipts and payments.
b. Must be used by all companies.
c. Is used by most companies.
d. Is considered supplementary disclosure.
e. Is not recommended by the FASB, but is commonly used.
Answer:
e. Is not recommended by the FASB, but is commonly used.
Explanation:
A statement of cash flows is also known as cash flow statement and it is a financial statement which is used to illustrate how changes in income and various account of the balance sheet affect cash and cash equivalents.
The statement of cash flows is also used by financial experts or accountants to breakdown the cash-flow analysis into;
1. Cash-flow from investing activities: it represents the cash flow from investment such as proceeds from the sale of plant, equipments etc.
2. Cash-flow from financing activities: it represents the cash flow from debt or equity. Typically, it's the costs used in a financing a business.
3. Cash-flow from operating activities: it represents cash-flow and transactions from operational business activities such as employee salary, sales of goods etc.
Generally, the statement of cash flows provides financial information about an organization's operating profitability and how it use its operating cash flow.
Financial accounting standards board (FASB) is a private, non-profit organization saddled with the responsibility of establishing and maintaining financial accounting and reporting standards for general guidance of individuals or capital providers such as investors, issuers and auditors.
In Financial accounting, the direct method of reporting operating cash flows uses actual cash inflows and outflows from the operating activities of a company by generating data from the income statement (cash receipts and cash disbursements/payments).
However, the direct method of reporting operating cash flows is not recommended by the FASB, but it's commonly used.
This ultimately implies that, it's a recommended accounting method, but it's not an accounting standard required by the financial accounting standards board (FASB).
Marconi Co. has the following information available for the current year:
Net Sales (all on credit) $1,125,000
Bad Debt Expense 90,000
Accounts Receivable, Beginning of Year 180,000
Accounts Receivable, End of Year 82,500
Allowance For Doubtful Accounts, Beginning of Year 57,000
Allowance For Doubtful Accounts, End of Year 77,000
Required:
What was the amount of write-offs during the year?
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trình bày ưu nhược điểm của các loại hình doanh nghiệp
Answer:
Explanation:
Doanh nghiệp tư nhân;
Công ty hợp danh;
Công ty TNHH 1 thành viên;
Công ty TNHH 2 thành viên;
Công ty cổ phần;
Project managers can identify risks by learning and understanding the cause and effect relationships that bear on risk events. All of the following approaches rely upon an understanding of cause and effect relationships to identify risks EXCEPT:
a. perform a Monte Carlo analysis
b. understand trigger conditions, or circumstances under which a risk strategy or risk action will be invoked
c. conduct a root cause analysis
d. develop a flow chart that shows how people, materials or data flow from one person or location to another
Answer:
Interviews. Select key stakeholders. ...
Brainstorming. I will not go through the rules of brainstorming here. ...
Checklists. See if your company has a list of the most common risks. ...
Assumption Analysis. ...
Cause and Effect Diagrams. ...
Nominal Group Technique (NGT). ...
Affinity Diagram.
Explanation:
Create a risk register. Create a risk register for your project in a spreadsheet. ...
Identify risks. ...
Identify opportunities. ...
Determine likelihood and impact. ...
Determine the response. ...
Estimation. ...
Assign owners. ...
Regularly review risks.
Clay Co. produces ceramic coffee mugs and pencil holders. Manufacturing overhead is assigned to production using an application rate based on direct labor hours. Required: a. For 2013, the company's cost accountant estimated that total overhead costs incurred would be $461,100 and that a total of 53,000 direct labor hours would be worked. Calculate the amount of overhead to be applied for each direct labor hour worked on a production run. (Round your answer to 2 decimal places.)
Answer:
Predetermined manufacturing overhead rate= $8.7 per direct labor hour
Explanation:
Giving the following information:
Estimated that total overhead costs= $461,100
Estimated total direct labor hours= 53,000
To calculate the predetermined manufacturing overhead rate we need to use the following formula:
Predetermined manufacturing overhead rate= total estimated overhead costs for the period/ total amount of allocation base
Predetermined manufacturing overhead rate= 461,100 / 53,000
Predetermined manufacturing overhead rate= $8.7 per direct labor hour
Q.1.1
If the Owners Equity of a certain business is equal to R70 000 and the assets of the
same business are equal to R120 000, what would the total liabilities of the
business be?
(a) 50 000
(b)
190 000;
(c)
70 000;
(d)
120 000
Answer:
The answer of this question is (B)190000
Assume market interest rates have risen substantially in the 5 years since an investor purchased Treasury bonds that were offering a 3% return over their 15-year life. If the investor sells now, he or she is likely to realize a total return that is:__________
A. greater than 6%.
B. less than 6%.
C. equal to 2%.
D. equal to 6%.
Answer: B. less than 6%.
Explanation:
Market interest rates have risen since the investor purchased the treasury bonds which means that the treasury bonds will be less sought after now because they offer a lower return than can be found in the market even if risk adjusted.
The investor will therefore only be able to sell it for a lower price which means that they will receive a lower rate for it. As we cannot say for certain what this rate will be, it is best to say that it will be under 6%.
