USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)

question 48

Multiple Choice

USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
In late January 2004, The Union Cosmos Company is considering the sale of $100 million in 10-year bonds that will probably be rated AAA like the firm's other bond issues. The firm is anxious to proceed at today's rate of 10.5 percent. As treasurer, you know that it will take until sometime in April to get the issue registered and sold. Therefore, you suggest that the firm hedge the pending issue using Treasury bond futures contracts each representing $100,000.

-Refer to Exhibit 15.1. What is the dollar gain or loss assuming that future conditions described in Case 1 actually occur? (Ignore commissions and margin costs.)

• A) $2,945,000.00 gain
• B) $65,500.00 gain
• C) $2,945,000.00 loss
• D) $65,500.00 loss
• E) $10,500.00 loss

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Definitions:

Premium

An amount paid in addition to the standard or nominal cost, often associated with insurance or the additional amount above the par value for securities.

IFRS Accounting

The practice of maintaining financial records and reporting financial results in accordance with the International Financial Reporting Standards.

U.S.GAAP

U.S.GAAP (United States Generally Accepted Accounting Principles) comprises a broad set of accounting standards developed by the Financial Accounting Standards Board (FASB) used for preparing financial statements in the U.S.

Contingencies

Potential liabilities or gains that may occur in the future, dependent on the outcome of a specific event.