ECON 2560 Lecture Notes - Current Yield, Accrued Interest, Nominal Interest Rate

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lilacsheep903

6 Aug 2014

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Profits record income + expenses at time of sales not when cash changes occur. Profits do not consider changes in net working capital. Annuities- cash flows equal amount every period for a limited # of periods. Perpetuities cash flows of equal amount every period for unlimited # of perpetuities to calculate the present value of perpetuities you divide level of cash flows by rate. Discount rate interest rate used to compute present values of future cash flows. Bond- security that obligates the issuer to make specified payments to the bondholder. Face value- payment at the maturity of the bond. Coupon rate- annual interest payment percentage of face value. Accrued interest coupon interest earned from the last coupon payment to the purchase date of the bond. Clean bond price bond price excluding accrued interest. Dirty bond price- bond price including accrued interest.

Related Questions

Subaru's Sales Boom Thanks to the Weaker Yen For the Japanese carmaker Subaru, a sharp fall in the value of yen against the U.S. dollar has turned a problem the lack of U.S. production into an unexpected sales boom. Subaru, which is a niche player in the global auto industry, has long bucked the trend among its Japanese rivals of establishing significant manufacturing facilities in the North American market. Instead, the company has chosen to concentrate most of its manufacturing in Japan in order to achieve economies of scale at its home plants, exporting its production to the United States. Subaru still makes 80 percent of its vehicles at home, compared with 21 percent for Honda. Back in 2012, this strategy was viewed as something of a liability. In those days, one U.S. dollar bought only 80 Japanese yen. The strong yen meant that Subaru cars were being priced out of the U.S. market. Japanese companies like Honda and Toyota, which had substantial production in the United States, gained business at Subaru's expense. But from 2012 onward, with Japan mired in recession and consumer prices falling, the country's central bank repeatedly cut interest rates in an attempt to stimulate the economy. As interest rates fell in Japan, investors moved money out of the country, selling yen and buying the U.S. dollar. They used those dollars to invest in U.S. stocks and bonds where they anticipated a greater return. As a consequence, the price of yen in terms of dollars fell. By December 2015, one dollar bought 120 yen, representing a 50 percent fall in the value of the yen against the U.S. dollar since 2012. For Subaru, the depreciation in the value of the yen has given it a pricing advantage and driven a sales boom. Demand for Subaru cars in the United States has been so strong that the automaker has been struggling to keep up. The profits of Subaru's parent company, Fuji Heavy Industries, have surged. In February 2015, Fuji announced that it would earn record operating profits of around Â¥410 billion ($3.5 billion) for the financial year ending March 2015. Subaru's profit margin has increased to 14.4 percent, compared with 5.6 percent for Honda, a company that is heavily dependent on U.S. production. The good times continued in 2015, with Subaru posting record profits in the quarter ending December 31, 2015. Despite its current pricing advantage, Subaru is moving to increase its U.S. production. It plans to expand its sole plant in the United States, in Indiana, by March 2017, with a goal of making 310,000 a year, up from 200,000 currently. When asked why it is doing this, Subaru's management notes that the yen will not stay weak against the dollar forever, and it is wise to expand local production as a hedge against future increases in the value of the yen. Indeed, when the Bank of Japan decided to set a key interest rate below zero in early February 2016, the yen started to appreciate against the U.S. dollar, presumably on expectations that negative interest rates would finally help stimulate Japan's sluggish economy. By late March 2016, the yen had appreciated against the dollar and was trading at $1=112 yen. Sources: Chang-Ran Kim,Subaru-Maker, Fuji Heavy Lifts Profit View on Rosy US Sales, Weak Yen Reuters, February 3, 2015; Yoko Kubota, Why Subaru's Profit Is Surging, The Wall Street Journal, November 14, 2014; Doron Levin, Subaru Profit Soaring on Weaker Yen, Market Watch, November 15, 2014; Y. Kubato, Weaker Yen Drives Subaru Makers Profit Higher, The Wall Street Journal, February 4, 2016. Page 294

Case Discussion Questions:

Why do you think that historically, Subaru chose to export production from Japan, rather than set up manufacturing facilities in the United States like its Japanese rivals?

What are the currency risks associated with Subaru's export strategy?

What are the potential benefits? Why did Subaru's sales and profits surge in 2014 and 2015? Is Subaru wise to expand its U.S. production capacity?

What other strategies could the company use to hedge against adverse changes in exchange rates? What are the pros and cons of the different hedging strategies Subaru might adopt?

ambermoose899

Parker Products manufactures a variety of household products. The company is considering introducing a new detergent. The companyâs CFO has collected the following information about the proposed product. (Note: You may or may not need to use all of this information, use only the information that is relevant.)

The project has an anticipated economic life of 4 years.

The company will have to purchase a new machine to produce the detergent. The machine has an up-front cost (t = 0) of $1.6 million. The machine will be depreciated on a straight-line basis over 5 years (that is, the companyâs depreciation expense will be $320,000 in each of the first four years (t = 1, 2, 3, and 4). The company anticipates that the machine will be sold when the project expires at a salvage value of $400,000.

If the company goes ahead with the proposed product, it will have an effect on the companyâs net operating working capital. At the outset, t = 0, inventory will increase by $140,000 and accounts payable will increase by $40,000. At t = 4, the net operating working capital will be recovered after the project is completed.

The detergent is expected to generate sales revenue of $1 million the first year (t = 1), $2 million the second year (t = 2), $2 million the third year (t = 3), and $1 million the final year (t = 4). Each year the operating costs (not including depreciation) are expected to equal 50 percent of sales revenue.

The companyâs interest expense each year will be $100,000.

The new detergent is expected to reduce the after-tax cash flows of the companyâs existing products by $146,000 a year (t = 1, 2, 3, and 4).

The companyâs overall WACC is 10 percent. However, the proposed project is riskier than the average project for Parker; the projectâs WACC is estimated to be 11 percent.

The companyâs tax rate is 30 percent.

*****What is the net present value of the proposed project?

*****The Parker Productsâ policy is to recover the cost of this type of project within 3 years. What is the payback period for the project?

*****What should Parker Products do about this project? Accept or reject? Provide arguments for your answer.

1. Which of the following transactions would add to the value of the U.S. GDP?

A. A college student buys a used car.
B. A college student sells her used textbooks back to the bookstore.
C. A grocery store purchases new freezers made in the United States.

D. U.S. citizen buys a new television manufactured in Asia.

2. The growth rate of real GDP:
A. depends on which year is used as the base year.
B. depends on how quickly prices are rising.
C. is always equal to the rate of growth of nominal GDP. D. is always more than the rate of growth of nominal GDP.

3. Which statement is true about GDP?
A. GDP includes the values of all final and intermediate goods and services.
B. Only the products made by American workers are included in the calculation of the US GDP.

C. Sales of old houses and used cars are included in the calculation of GDP for the current year.

D. In the US, GDP is calculated both annually and quarterly.

4. Which statement is true about GDP growth?
A. The GDP deflator is a measure of economic growth.
B. If we want to compare GDP over time, we should always compare real GDP.
C. Most economists choose nominal GDP growth as a single indicator of economic performance.

D. The GDP deflator tells the quantity change of production.

5. Which of the following is a way to compute GDP?

A. add up the wages paid to all workers

B. add up the quantities of all final goods and services
C. add up the market value of all final goods and services

D. add up the rents paid by all tenants

6. A farmer produces oranges and sells them to Fresh Juice, which makes orange juice. The oranges produced by the farmer are called:
A. inventory goods
B. transitory goods

C. final goods
D. intermediate goods

7. Martin, a US citizen, travels to Mexico and buys a newly manufactured motorcycle there. His purchase is included in:

A. both Mexican GDP and US GDP.

B. Mexican GDP, but not in US GDP.

C. US GDP, but not in Mexican GDP.

D. neither Mexican GDP nor US GDP.

8. Which of the following is included in Singapore GDP?

A. The value of production by a Singaporean working in the US.
B. The value of production by an American working in Singapore.
C. The value of production by a Singaporean that crosses the order to work in Malaysia.

D. All of the above are correct.

9. In the equation Y = C + I + G + NX,
A. Y represents the economy's total expenditure.

B. C represents household on durable goods.
C. all of the variables are always positive numbers.

D. All of the above are correct.

10. Consumption consists of spending by households on goods and services, except

purchases of intangible services.

purchases of durable goods.

purchases of new houses.

spending on education.

11. Which of the following is included in government purchase?

A. unemployment benefits a state government pays

B. social security payments the US government makes
C. the services of a US government attorney valued at the cost of her salary

D. All of the above are correct.

12. Transfer payments are:

A. included in GDP because they represent income to individuals.
B. included in GDP because they eventually will be spent on consumption.
C. not included in GDP because they are not payments for currently produced goods or services.

D. not included in GDP because taxes will have to be raised to pay for them.

13. Net exports equal
A. exports plus imports

B. exports minus imports

C. imports minus exports

D.GDP minus imports

14. In the economy of TAMIU in 2015, exports were $200, GDP was $2000, government purchases were $200, imports were $270, and investment was $500. What was TAMIU's consumption in 2015?

A. $830

B. $1230

C. $1370

D. $1770

15. Nominal GDP will increase when

A. prices increase and output increases.
B. prices increase and output decreases.
C. prices decrease and output increases.

D. All of the above are correct.

16. Changes in real GDP reflect:

A. only changes in prices.

B. only changes in the amounts being produced.
C. both changes in prices and changes in the amounts being produced.

D. neither changes in prices nor changes in the amounts being produced.

17. Which of the following is correct?
A. Nominal GDP is always less than real GDP.

B. Nominal GDP is always greater than real GDP.
C. Nominal GDP equals real GDP in the base year.
D. Nominal GDP equals real GDP in all years but the base year.

18. The GDP deflator is the ratio of:

A. real GDP to nominal GDP.

B. real GDP to the inflation rate.
C. real GDP to nominal GDP.
D. nominal GDP to the inflation rate.

19. In 2012 the nominal GDP was $18 billion and the GDP deflator was 120, what was real GDP?
A. $6.7 billion
B. $10 billion

C. $40 billion D. $100 billion

20. In the base year, the GDP deflator is always equal to A. -1
B. 0
C. 2

D. 1

21. GDP does not reflect:

A. the value of leisure.

B. the value of goods and services produced at home.

C. the quality of the environment.
D. All of the above are correct.

22. When economists talk about growth in the economy, they measure that growth as the:

A. absolute change in nominal GDP from one period to another.

B. percentage change in nominal GDP from one period to another.

C. absolute change in real GDP from one period to another.
D. percentage change in real GDP from one period to another.

23. The term economists use to describe a situation in which the economyâs overall price level is rising is:

A. economic growth

B. inflation
C. recession
D. business cycles

Use information from the Bureau of Economic Analysis (BEA) website, http://www.bea.gov/, answer question 24 and 25.

24. What is the real GDP growth rate in the 4th quarter of 2015 for the United States?

A. 1%
B. 2%
C. 3%

D. 4%

25. What is the value of real GDP in 1998 for the United States?

A. $11525.9 billion

B. $9089.2 billion

C. $11321.2 billion

D. $8889.7 billion

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ECON 2560 Lecture Notes - Current Yield, Accrued Interest, Nominal Interest Rate

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