Consider a bond that pays $1000 in one year. Suppose that the market interest rate for savings is 8%, but the interest rate for borrowing is 10%. The price range that this bond must trade in a normal market if no arbitrage opportunities exist is closest to:
A) $909 to $917
B) $909 to $926
C) $917 to $926
D) $909 to $1000
B
Explanation: B) VB @ 8% = 1000/1.08 = $926 VB @ 10% = 1000/1.10 = $909 so range is 909 to 926
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Marla Company borrowed $100,000 on a 10-year, 7% installment note payable on January 1, 2005. The terms of the note require Marla to pay 10 equal payments of $14,238 each December 31 for 10 years. The required general journal entry to record the first payment on the note on December 31, 2005 will involve:
A) a debit to Notes Payable of $10,000 B) a debit to Cash of $14,238 C) a debit to Interest Expense of $14,238 D) a debit to Notes payable of $14,238 E) a debit to Notes Payable of $7,238
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Indicate whether the statement is true or false.