Herbert Avocado Has Just Come Up with an Idea for a New

question 46

Essay

Herbert Avocado has just come up with an idea for a new type of financial intermediary,which is designed to take advantage of the opportunity presented by an inverted yield cure,such as the one that existed in 1981 when one-year bonds were yielding 16% and 30-year bonds were at 14%.When the yield curve becomes inverted,Avocado's firm will issue long-term bonds and use the proceeds to buy one-year instruments that have higher yields and are less risky.Avocado is now just waiting for the yield curve to become downward sloping again so that he can get his firm off the ground and make his fortune.What do you think of his plan?

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Definitions:

Management's Intent

The plans and objectives that company management has regarding future operations, investments, or actions, which can affect financial reporting and decision-making.

Financial Statements

Documents summarizing a corporation's financial status, encompassing the balance sheet, income statement, and statement of cash flows.

Comparability

The ability to use accounting information to compare the financial performances of different entities.

Held-To-Maturity Bonds

Debt securities that an investor intends and is able to hold until a fixed maturity date, recording such investments at their original acquisition cost, adjusting for amortization.