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Original question: The interest rate paid on a bond varies with the bond’s presumed riskiness. More risky bonds pay higher interest rates to investors. Do you think the interest rate is always a perfect measure of riskiness? Explain why or why not.

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RESPOND TO: A key rate risk analysis is one of the most commonly used methods of evaluating interest rate risk. This analysis is essentially completing a more rigorous sensitivity analysis by varying each data input that is used in building the yield curve. By doing this type of analysis, a risk profile can be created to determine which part of the yield curve they are most exposed to risk. The treasury department can then make a decision as to how it wants to manage this risk. The key rate analysis is also important for cash flow management and will allow for better forecasting.

RESPOND TO:The interest rate paid on a bond does very accurately convey a level of risk that the investor may incur. Though less volatile than investing in stocks, bonds also present a level of risk to an investor. There’s inflation risk, timing risk, performance risk, and so on (The Securities, 2013). But there’s also other things to consider such as the motivation of the entity that offers the bond, their costs, and the entity’s financial state as well as the economy as a whole. Given the different types of risks involved when investing even in bonds, the interest rate that the bond is offered at is affected by costs and risks but ultimately the investor can still look at the interest rate as a good indication of risk they’re undertaking.

 

Original question: By creating financial statements using Generally Accepted Accounting Principles, financial managers ensure that the financial statements for their companies are comparable to other companies’ statements. In what ways may companies distinguish their performance within the context of audited financial statements? 

RESPOND TO: The ways that a company may distinguish their performance within the context of audited financial statements would be accuracy, as we are speaking of audited, profitability, level of detail, expense vs revenue ratio.  These items would help distinguish performance.  Other areas may not hit the local financial, but possibly corporate such as 401K matching or other benefits provided based on the profitability of the company.

RESPOND TO Companies distinguish their performance within the context of audited financial statements in order to determine where they stand amongst their competitors as well their financial positions/statements, results of operations, and cash flows in conformity with generally accepted accounting principles. Financial statements are used by companies as well, managers require financial statements to make important business decisions that affect its continued operations. The financial analysis takes place on these statements to provide management with a more detailed understanding of the figures.

 


Original question:Junk bonds are defined as bonds which have ratings that fall below BB/Ba (S&P and Moody’s rating, respectively). Discuss why you would or would not invest in a junk bond. 

RESPOND TO Junk bonds present a great opportunity to earn a much higher interest yield than what can be earned on “investment grade” bonds. There is a higher risk associated with junk bonds, which is the reason for their higher interest rate yield, just like with any other investment options: The higher the risk, the greater the reward. Careful study needs to be done to make sure that you’re not purchasing bonds from organization or company who may not honor their promise to pay interest and/or principal back to investors. State of Rhode Island is now facing the danger of having their current and future borrowings downgraded to “junk bond status.” (Gregg, 2014). If that was to happen, it would be a prime opportunity to snatch up bonds issued by Rhode Island at a high yield and low risk since the whole 38 Studios fiasco would mean much more careful oversight of business in the state

RESPOND TOHigh Yield “Junk” bonds were invented to enable smaller companies or big investors to use bonds and bond markets to finance takeovers. The original concept was good and legal; but overly aggressive stockbrokers and arbitrageurs, aided by large investment firms, exploited and corrupted it. They used illegal inside information, deliberately-planted misinformation and market rigging to make millions and millions of dollars while, in some instances, destroying profitable old companies. Some of these multimillionaires are now in the penitentiary. Unfortunately, this kind of greed is still rampant.

 

Original question:Taxable income differs from net income for accounting purposes and net cash during a year. Does it make sense for tax policy to influence business decisions? (For example, accelerated depreciation decreases taxable income, which economists suggest encourages business investment.)

 

RESPOND TOI believe this is key. For instance, while it may be advantageous to incorporate in DE as a supplier, its also beneficial to be a purchaser in OR since you pay no sales taxes there. There are also places where property taxes are low and less regulations are in place. In short, it depends.

 

RESPOND TOYes, it definitely makes sense for tax policy to influence business decisions.  If the tax rate can be decreased, this further makes available the capital for reinvestment in the company.

For example, bidding for the Tesla factory I am sure took many things into consideration, location, weather, accessibility to shipping lanes, but I am most certain, as in many cases, it came down to incentives and tax relief.   I like what one of my others classes mentioned, “Cash is King”.

 

Decrease overhead, tax breaks create an avenue / incentive for growth.

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