What is the total market value of lov debt

Assignment Help Finance Basics

Reference no: EM133331688

Problem: One of the industries most affected by oil prices is the airline industry. After labor costs, the price of jet fuel is typically the most important cost component for airline companies. In spite of this fact, hedging practices vary significantly within the industry. For example, Southeast Airlines (LOV) has more than half of its total jet fuel exposure hedged at the equivalent of $30-$40 per barrel of oil, whereas United States Airlines (USA) does not hedge any of its jet fuel exposure. Currently, the market value of United States Airlines' assets is $26 billion, and it has promised to pay its bondholders $20 billion one year from now. Southeast Airlines holds assets worth $7 billion, and it has promised to pay its bondholders $3.5 billion one year from now. The riskless rate of interest is 5% per year, the standard deviation of the return on USA's assets is 50% per year, and the standard deviation of the return on LOV's assets is 30% per year.

A. What is the total market value of USA debt? What is the yield to maturity for USA debt?

B. What is the total market value of LOV debt? What is the yield to maturity for LOV debt? Now suppose that the federal government initiates a loan guarantee program that requires taxpayers to fully guarantee USA and LOV bonds against the risk of default.

C. What is the dollar value of the federal government's loan guarantee to USA bondholders? What effect does the initiation of the federal government's loan guarantee to USA have upon the yield to maturity for USA debt?

D. What is the dollar value of the federal government's loan guarantee to LOV bondholders? What effect does the initiation of the federal government's loan guarantee to LOV have upon the yield to maturity for LOV debt?

Reference no: EM133331688

Questions Cloud

Discuss the fundamental idea of the opportunity : Then, consider the fundamental idea of the opportunity and how it fits into the Kingdom of Saudi Arabia's 2030's vision.

What percentage of capital budget must be financed with debt : It finances with debt and common equity, but it wants to avoid issuing any new common stock during the coming year. Given these constraints

What is management compensation fair : "Is Management Compensation Fair?" (Section 6.3). Respond to ONE of the following sets of critical thinking questions.

Determine the profit or loss if you borrow in pounds : You can borrow at most €1,000,000 or the equivalent pound amount. Suppose you are a Euro-based investor. Determine the profit/loss (in EUR, no cents)

What is the total market value of lov debt : What is the total market value of LOV debt? What is the yield to maturity for LOV debt? Now suppose that the federal government initiates a loan guarantee

Demonstrate an awareness of diversity in an organizational : Define organizational behaviour to appreciate its application in the workplace Explain how scientific research supports organizational theory and application

Discuss the quality of the programs deliverables : Discuss how the quality of the program's deliverables and outcomes can be monitored and evaluated for continuous improvement.

What if rational discounting is used : The annual interest rate is 4%. How much did Company X have to pay today if commercial discounting is used? What if rational discounting is used?

Concept of unique value proposition : How are the boxes, "Problem", "Solution", "Customer Segments" related to the concept of "Unique Value Proposition" ? Explain your answer with an example.

User Account

All Pages