Question

In: Finance

1. Explain how uncertainty concerning future interest rates would affect the decision to refund a bond...

1. Explain how uncertainty concerning future interest rates would affect the decision to refund a bond issue.

2. Define the following: direct lease, sale-leaseback arrangement, leveraged lease, and financial (capital) lease.

3. What elements must be included in a lease in order for it to be considered a financial (capital) lease?

Solutions

Expert Solution

1]

A bond issue would be refunded if the current interest rates are less than the interest rates when the bond was issued.

If the current interest rates have fallen, and there is uncertainty regarding the future interest rates, then the bonds would most likely be refunded to take advantage of the lower current interest rates. However, if there is some certainty that the future interest rates would be lower than current rates, the bond refund may be put off until later to take advantage of the falling interest rates.

2]

A direct lease is the most simple form of lease where a lessor and a lessee enter an agreement to lease an asset. The lessee makes periodic payments to the lessor in exchange for using the asset. The lease could be an operating or a financial lease. Ownership remains with the lessor.

A sale-leaseback arrangement is one where the business which owns an asset sells it to a leasing company, and leases it back from the leasing company for using in its business operations.

A leverage lease is a lease arrangement where the funds required for purchase of the asset are borrowed by the lessor. The lessee makes lease payments to the lessor. The ownership of asset remains with the lender

A financial lease is a type of leasing arrangement where the terms of the lease are such that the lessee is effectively purchasing the asset.

3]

To be considered a financial lease, any of these criteria must be met :

  • The life of the lease is 75% or more of the asset's useful life
  • The purchase price offered to the lessee at the end of the lease term is less than its market price at the end of the lease term
  • The lessee will own the asset at the end of the lease term
  • Present value of lease payments is more than 90% of the asset's current market value

jeff jeffy answered 6 months ago
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