Exhibit 16-6
USE THE FOLLOWING INFORMATION FOR THE NEXT PROBLEM(S)

question 61

Multiple Choice

Exhibit 16-6
USE THE FOLLOWING INFORMATION FOR THE NEXT PROBLEM(S)
The following information is given concerning a substitution swap: You currently hold a 25 year, Aa 10% coupon bond priced to yield 12%. As a swap candidate you are considering a 25 year, Aa 10% coupon bond priced to yield 13%. Assume a reinvestment rate of 12%, semiannual compounding, and a one-year workout period. $\begin{array}{lcc}&\text { Current Band } & \text { Candidate Band } \\\hline\text { Dollar Investment } & \$ 842.38 & ? \\\text { Coupon } & 100.00 & 100.00 \\\text { i on One Coupon } & 3.0 & 2.75 \\\text { Principal Value at Year End } & 843.50 & 780.46 \\\text { Total Accrued } & 946.50 & 883.21 \\\text { Total Gain } & 104.12 & ? \\\text { Gain per Invested Dollar } & ? & ? \\\text { Realized Compound Yield } & ? & ?\end{array}$

-Refer to Exhibit 16-6. The dollar investment in the candidate bond is

• A) $1515.36
• B) $853.50
• C) $780.46
• D) $779.13
• E) $877.53

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Definitions:

Cash Flows

The overall volume of cash inflows and outflows within a corporation, significantly affecting its liquid assets.

Operating Activities

The day-to-day actions that are involved in running a business, such as buying, selling, and producing goods or services.

Indirect Method

A way of preparing the statement of cash flows where net income is adjusted for changes in balance sheet accounts to calculate the cash from operating activities.

Operating

Refers to the day-to-day activities involved in running a business that are essential for generating revenue.