Consider an Asset with a Current Market Value of $250

question 9

Multiple Choice

Consider an asset with a current market value of $250 000 and a duration of 3.3 years. Assume the asset is partially funded through zero-coupon bonds which currently sells for $225 000 and has a maturity of 4 years. The current discount rate is 15 per cent and interest rates are expected to increase by 150 basis points. Which of the following statements is true?

• A) The current net worth of the position is $25 000 and if interest rates increase the net worth will not be affected.
• B) The current net worth of the position is $25 000 and if interest rates increase the net worth will increase, too.
• C) The current net worth of the position is $25 000 and if interest rates increase the net worth will decrease.
• D) The current net worth of the position cannot be determined, however, if interest rates increase the net worth will increase, too.

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Definitions:

Goodwill

Goodwill is an intangible asset that arises when a business is acquired for more than its fair value, attributed to non-physical assets like reputation or brand name.

Acquisition-Date Fair Value

The measurement of an asset's or liability's market value at the exact day a business combination is executed.

Acquisition Method

An accounting approach used for consolidating the financial statements of a group where one entity has control over the others.

Noncontrolling Interest

An ownership interest in a subsidiary that is not large enough to control the company's operations, often represented as a separate component of equity in the consolidated financial statements.