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16-12 (Interest rate risk)

Two years ago your corporate treasurer purchased for the firm a 20 year bond at its par value of $1,000. The coupon rate on this security is 8 percent. Interest payments are made to bondholders once a year. Currently, bonds of this particular risk class are yielding investors 9 percent. A cash shortage has forced you to instruct your treasurer to liquidate the bond.

a. At what price will your bond be sold? Assume annual compounding.

b. What will be the amount of your gain or loss over the original purchase price?

c. What would be the amount of your gain or loss had the treasurer originally purchased a bond with a 4 year rather than a 20 year maturity? (Assume all characteristicf the bonds are identical except their maturity periods.)

d. What do we call this type of risk assumed by your corporate treasurer?

16-6 (Ratio analysis) Assuming a 360 – day year, calculate what the average investment in inventory would be for a firm, given the following information in each case.

a. The firm has sales of $600,000, a gross profit margin of 10 percent, and an inventory turnover ratio of 6.

b. The firm has a cost-of-goods-sold figure of $480,000 and an average age of inventory of 40 days.

c. The firm has a cost-of-goods-sold figure of $1.15 million and an inventory turnover rate of 5.

d. The firm has a sales figure of $25 million, a gross profit margin of 14 percent, and an average age of inventory of 45 days.