The direct method is relies on changing the contractual characteristics of Asset and Liabilities to reach a particular duration and maturity gap to get over any Asset and Liability mismatch. On other hand the synthetic method relies on using derivatives such as interest rate swaps, future, options and other customized instruments like AIRS. Since the direct method is not always possible using the synthetic method give higher degree of flexibility to Asset –Liability management process. Banc one can use the following financial instruments ( off –balance sheet) to hedge against interest rate risk : • Futures : is an agreement between buyer and seller to exchange a specific amount of financial products at a specific price in a specific future date. The management must be very careful to follow the regulatory and the accounting rules that govern the use of future contract.
This week we learned that companies are required to prepare a statement of cash flows because it gives a more accurate snapshot of the actual cash flow of a company. Financial statements give an overall picture of how much revenue a company is reporting, but high revenue does not guarantee that the company has the ability to pay its bills. The statement of cash flows is a tool designed to help external users make sound economic decisions about the company. The statement of cash flows is divided into three sections: 1) operating activities, 2) investing activities, and financing activities. The operating activities section analyzes the company's flow of cash as it relates to a net loss or net income.
If Ms. Thompson’s analysis was right, for investors holding callable bonds, they could make money from these discrepancies. Investors who don’t hold the callable bond can short sell the relatively overpriced security and buy the relatively underpriced one. 1. Create the two synthetic bonds described in
| Financial risk is the additional risk that common stockholders face as a result of the decision to finance with debt. | Example | Introduction of new product or services in the market. | Percentage of equity financing and debt financing in the company’s capital structure. | Affecting Factors | Variability in the product demand and production costs. | Quality of financial system in which country the company is operating, i.e., how available debt is.
Can the firm repay its loan within a reasonable period? 3. What are the key driver assumptions of the firm’s future financial performance? What are the managerial implications of those key drivers? That is, what aspects of the firm’s activities should Koh focus on especially?
What are the advantages of adding debt to the capital structure? How would issuing debt impact the company’s taxes and expected costs of financial distress? How would the financial markets react if the company increased its financial leverage? 3. How could Hill Country implement a more aggressive capital structure?
This action then helps to create business opportunities, employments, and demands thus resulting in reversion of the initial imbalance (www.en.wikipedia.org/wiki/Keynesian_economics). However, the investment of the government causes a deficit. Government funding source is through borrowing from the economy (i.e. government bonds) and it’s spending exceeds the amount of tax income received (www.en.wikipedia.org/wiki/Keynesian_economics). Friedrich Hayek Hayek recognized connections between three theories thus influencing his perspective of the economy.
b. Most sinking funds require the issuer to provide funds to a trustee, who holds the money so that it will be available to pay off bondholders when the bonds mature. c. A sinking fund provision makes a bond more risky to investors at the time of issuance. d. Sinking fund provisions never require companies to retire their debt; they only establish “targets” for the company to reduce its debt over time. e. If interest rates increase after a company has issued bonds with a sinking fund, the company will be less likely to buy bonds on the open market to meet its sinking fund obligation and more likely to call them in at the sinking fund call price.
According to our text capital budgeting is the process of planning and managing a firms long term investments. In this step the financial manager is looking to see what investment opportunities are likely to be worth more than they cost to acquire. Our book uses the example of a large chain of stores deciding whether or not to open a new location. Capital Structure is a specific mix of long-term debt and equity the firm uses to finance its operations. In this the financial manager is