Assume that you are the financial advisor for a recently retired couple. Your clients want to invest their savings in such a way as to receive a stable stream of cash flow every year throughout their retirement. They have expressed their concerns to you regarding the volatility of long-term bond prices when interest rates fluctuate.
If your clients invest their savings in a variety of long-term bonds and hold these bonds until maturity, will interest rate fluctuations affect their annual cash flow during their retirement years?
If someone were reading the statements and disclosures would it make a difference if the company were using straight line depreciation or an accelerated depreciation method. How would a person know which method is being used?
Financial statements are needed to make sound decisions about a company. Suppose you are a professional accountant working for a public accounting firm and you find yourself in a difficult situation. You have discovered some irregularities in the financial records of your firm's client. You are uncertain whether these irregularities are a result of carelessness or if they represent intentional steps taken to cover up questionable activities. You approach your superior about this and he indicates that you should ignore it. His response to you is "These things happen all of the time and usually are pretty minor. We are on a very tight time schedule to complete this engagement, so let's just keep our eyes on our goal of finishing our work by the end of the month." What would you do?
Clients who invest their savings in a variety of bonds and hold these bonds until maturity will not be affected by interest rate fluctuations during their retirement year as long as the changes involve short term interest rates. However, " a change (or no change when the market perceives that one in needed) in short term interest rates that affects long-term interest rates can greatly affect a long-term bonds price and yield" (Nielsen, 2009). Changes in long-term interest rates have an affect on long-term bonds. Rising interest rates reduce exiisting bond values and the longer the maturity of the bond investment the greater price volatility. This is because future cash flows are hazy and indistinct in the future. One can not forecast the direction of interest rates. To minimize capital losses the clients could invest in long term bonds at near interest rate peaks to lock in high rates or hold short term bonds.
Nielsen, B. ( 13 April, 2009). Understanding Interest Rates, Inflation and the Bond Market. Investopedia. Retrieved from http://www.investopedia.com/articles/bonds/09/bond-market-interest-rates.asp#axzz1rNiQardR.
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This solution addresses investment advice for recently retired couple; interest rate fluctuations for long term bonds; straight line vs. accelerated depreciation; and irregularities in finanacial statements.