Reference no: EM131007282
CMOS Chips is hedging a 20-year, $10 million, 7% bond payable with a 20-year interest rate swap and has designated the swap as a fair value hedge. The agreement called for CMOS to receive payment based on a 7% fixed interest rate on a notional amount of $10 million and to pay interest based on a floating interest rate tied to LIBOR. The contract calls for cash settlement of the net interest amount on December 31 of each year.
At December 31, 2011, the fair value of the derivative and of the hedged bonds has increased by $100,000 because interest rates declined during the reporting period.
Required:
1. Does CMOS have an unrealized gain or loss on the derivative for the period? On the bonds? Will earnings increase or decrease due to the hedging arrangement? Why?
2. Suppose interest rates increased, rather than decreased, causing the fair value of both the derivative and of the hedged bonds to decrease by $100,000. Would CMOS have an unrealized gain or loss on the derivative for the period? On the bonds? Would earnings increase or decrease due to the hedging arrangement? Why?
3. Suppose the fair value of the bonds at December 31, 2011, had increased by $110,000 rather than $100,000, with the additional increase in fair value due to investors' perceptions that the creditworthiness of CMOS was improving. Would CMOS have an unrealized gain or loss on the derivative for the period? On the bonds? Would earnings increase or decrease due to the hedging arrangement? Why?
4. Suppose the notional amount of the swap had been $12 million, rather than the $10 million principal amount of the bonds. As a result, at December 31, 2011, the swap's fair value had increased by $120,000 rather than $100,000. Would CMOS have an unrealized gain or loss on the derivative for the period? On the bonds? Would earnings increase or decrease due to the hedging arrangement? Why?
5. Suppose BIOS Corporation is an investor having purchased all $10 million of the bonds issued by CMOS as described in the original situation above. BIOS is hedging its investment, classified as available-for-sale, with a 20-year interest rate swap and has designated the swap as a fair value hedge. The agreement called for BIOS to make payment based on a 7% fixed interest rate on a notional amount of $10 million and to receive interest based on a floating interest rate tied to LIBOR. Would BIOS have an unrealized gain or loss on the derivative for the period due to interest rates having declined? On the bonds? Would earnings increase or decrease due to the hedging arrangement? Why?
Find the length of the wire
: The figure below show a telephone wire hanging between two poles at x = - b and x = b. It takes the shape of a catenary with equation y = c + a Find the length of the wire.
|
What will be each workers daily earnings
: What will be each workers daily earnings and How many bicycles will each worker assemble per day - Calculate the optimal lifetime incomes W+ and W- the firm will promise the two employees.
|
What is long-run total cost function-average cost function
: Suppose RCA presses records using two inputs, labor (L) and capital (K). Their production function is Q=(1/4)KL. The price of capital is $16 and the price of labor is $36. What is RCA’s long-run total cost function? What is RCA’s long-run average cos..
|
What is his optimal input combination
: Suppose that George operates a laundromat which requires two inputs, capital (K) and labor (L). Suppose George desires to produce 90 units of output, the cost of capital is $1 and the cost of labor is $27. What is his optimal input combination?
|
Does cmos have an unrealized gain or loss on the derivative
: Does CMOS have an unrealized gain or loss on the derivative for the period? On the bonds? Will earnings increase or decrease due to the hedging arrangement? Why?
|
Introducing new fitness watch to the market
: A technology company is planning on introducing a new fitness watch to the market. Rush the fitness watch to market by paying overtime and speeding up testing. The company will pay $5 million initially and will receive $3 million in annual profit fro..
|
Calculate the carrying values of both the swap account
: Prepare the journal entries during 2013 to record interest, net cash interest settlement for the interest rate swap, necessary adjustments for changes in fair value, and repayment of the debt.
|
About the acceptability or unacceptability of this project
: An oil and gas company is considering whether to begin drilling a new oil field. The company will need to pay $5 million as an initial investment in order to extract the oil. The company will operate the field for a total of 5 years, during which its..
|
What type of hedging transaction might be accounted
: Johnson & Johnson indicates that it expects that substantially all of the balance of deferred net gains on derivatives will be reclassified into earnings over the next 12 months as a result of transactions that are expected to occur over that period...
|