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    Discount terms; price and YTM of bond; financial st

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    1) A firm offers terms of 2/15, net 48. What effective annual interest rate does the firm earn when a customer does not take the discount?

    2) What is the Current Price and Yield to Maturity of a 8% semi-annual coupon bond if it has a current yield of 9.3% and matures in 10 years?

    3) Use the following list of accounts and balances, to prepare a balance sheet, income statement, cash flow statement and statement of retained earnings for Nina's FIRST YEAR in business, Nina has a 60% gross profit margin and 30% tax rate:

    Cash $10,000 Depreciation Exp 5,000
    Unearned Revenue 7,000 Accts Rec 18,000
    Dividends 2,000 Common Stock ?
    Prepaid Exp 2,000 Accum. Deprec. ?
    Accts Payable 23,000 Office Equipment 30,000
    Operating Exp 15,000 Ending Ret. Earning ?
    Sales 50,000 COGS ?
    Inventory 20,000 Tax Expense

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    Solution Preview

    Please see the attachments.

    1) A firm offers terms of 2/15, net 48. What effective annual interest rate does the firm earn when a customer does not take the discount?

    The effective rate is calculated as (1+ periodic rate)^compounding frequency - 1
    The periodic rate is calculated as % discount/(100-% discount) = 2/98 = 0.02041 and the compounding frequency is calculated as 365/(Payment days - discount period) = 365/(48-15) = 11.06
    Effective annual rate = (1+0.02041)^11.06-1 = 25.04%

    2) What is the Current Price and Yield to Maturity of a 8% semi-annual coupon bond if it has a current yield of 9.3% and matures in 10 years?

    Current yield = Annual Interest/Price
    Annual interest = 1,000X8% = $80 and the current yield = 9.3%
    Price = Annual interest/current yield = 80/9.3% = $860.22
    The Yield to Maturity (YTM) is the discounting rate ...

    Solution Summary

    The solution explains some questions relating to discount terms; price and YTM of bond and preparation of financial statements

    $2.19

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