1. What factors affect a government bond rating?  Can that rating change?  What happens when that bond rating changes?  What happens if a country defaults on its debt?

  • Creditworthiness

The most vital factor that usually affects rating of the bond is the Government's credit risk. Credit risk is defined in this scope as the ability of a Government to pay back its debts such as principal, interest payments on loans, dividends and insurance payments.

  • Future Performance

            The Credit rating agencies usually conduct intensive and extensive research as to the possible future performance of a bond. This kind of assessment will affect Government bond rating e.g. those which have experienced financial difficulties or financial instability will generally receive a lower credit rating.

  • Major Corporate Events

In case there is a negative corporate event, the bond rating is often downgraded since the company possesses an increased risk of credit default and subsequent drop in creditworthiness. On the other hand, positive corporate event will eventually upgrade the Government’s bond rating.

2.  Ways for assessing the practicality of a particular capitalization ratio?  From the online library, what specific resource might you pull and why?

Capital ratios, Testing the strength of the balance sheet or Debt-equity relationship can be used. The company can use the following resources: Debt ratio that helps in comparing the total assets and the total liabilities; debt-equity a ratio that compares total liabilities to the total equity of the shareholders; the capitalization ratio.

3. What are the differences between common stock and preferred stock? How is preferred stock accounted for and reported?

Common stock is the ownership in a given company just for the stock that were used to trading.  The risk attached to common stock is the falling of price. Just as with common stock, the preferred stock is being sold by companies and is then is traded among investors on the tertiary market.

Preferred stock is less risky if compared to common stock, therefore investors can also expect less reward. It has been designed to provide income generating chances for investors while raising capital for an underlying company (Krugman, 2009).


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4. What are the elements that should be included on the equity section of a balance sheet? Provide examples of these elements.

There are six components making up stockholders’ equity on the balance sheet these are: preferred stock, retained earnings, additional paid-in capital, treasury stock, common stock and other comprehensive income (Ormrod, 2003).

5. What are the basic guidelines for accounting for derivatives? How should companies report derivatives in financial statements?

  • First is to recognize derivatives in the financial statements as liabilities and assets.
  • Second is to report the derivatives at fair value.
  • The third step is to recognize losses and gains that result from speculation in derivatives in income.
  • Last step is to report losses and gains that result from hedge transactions, depending on the type of hedge.

In reporting derivatives, companies usually report derivative financial instruments in the balance sheet and then record them at fair value. With the exception of derivatives that are used in hedging, companies normally record the realized and unrealized gains and losses on the derivative financial instruments in income.

6. What are the disclosure requirements for traditional and derivative financial instruments? Should companies disclose if such instruments are used for hedging or speculation? Why?   

Companies are advised to disclose the fair value of their financial instruments. The disclosures should be able to distinguish between amounts representing liabilities or assets. The disclosures must again distinguish between the financial instruments held or the ones issued for purposes other than that of trading (Ormrod, 2003). For the purpose of derivative financial instruments the company should be able to disclose whether to use the instruments for hedging or speculation. Companies are expected, to provide quantitative information regarding to market risks of derivative financial instruments.

7. What are the two methods used to convert trial balances from foreign currencies into U.S. dollars? Describe the situations when you would use each method.

These methods are:

  • Translation used where the subsidiary is a comparatively self-contained unit that is very independent of the parent company’s operations.
  • Remeasurement is appropriate when the subsidiary is not operating independently of the parent company.

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