ZuoTi.Pro
Question

INTEREST RATE SWAP HW PROBLEM Firm A can issue fixed-rate debt e-40:0 and floating rate debt e LIBOR+ 20 bps. Firm B, less credit worthy, can issue fixed-rate debt @ 12.0% and floating rate debt @ LIBOR + 60 bps. Firm A wishes to issue floating rate debt and firm B wishes to issue fixed rate debt. Take the part of a swap intermediary and create a fixed floating interest rate swap with terms that benefit all three partiesfirm A, firm B, and the intermediary Instructions: 1.) Choose any terms you wish. 2.) Draw, a cash flow diagram showing cash flows between a 3.) State separately the net gain to firm A, firm B, and ll parties involved. the intermediary. pv-

business   finance   
0 0
Add a comment Improve this question Transcribed image text
Next > < Previous
Sort answers by oldest

Homework Answers

Answer #1

Firm A Firm B Fixed 10% 12% Floating L+20 Floating L+60 Fixed Firm A has comparative advantages in both the rate:s Let us assume the intermediary charges are 0.5% Firm A opts fixed borrowing and Firm B opts floating borowings and exchange the same 10 12 13 2) Firm A Intermediary 10% Firm B 15 16 17 18 19 3) 20 21 10% Net gains Total gain 1.1 % Firm A Firm A Intermediary 0.55 % 0.55 % 0.5 %Floating L 20 L 60 Fixed Firm A Firm B 8 Floating Fixed 0.12 Firm A has comparati Let us assume the int Firm A opts fixed borr 10 Firm B Intermediary 13 2) 14 Firm A 6 0.1 16 17 18 19 3) Firm A Firm A Intermediary Net gains -C19/2 =F19 0.5 Total gain 12+02-10-06-05 % 21

0 0
Add a comment
Know the answer?
Add Answer to:
INTEREST RATE SWAP HW PROBLEM Firm A can issue fixed-rate debt e-40:0 and floating rate debt...
Your Answer:

Post as a guest

Your Name:

What's your source?

Earn Coins

Coins can be redeemed for fabulous gifts.

Log In

Sign Up

Not the answer you're looking for? Ask your own homework help question. Our experts will answer your question WITHIN MINUTES for Free.
Similar Homework Help Questions

  • Billy Enterprises can issue floating-rate debt at LIBOR + 2 percent or fixed-rate debt at 10.00...

    Billy Enterprises can issue floating-rate debt at LIBOR + 2 percent or fixed-rate debt at 10.00 percent. Kidd Manufacturing can issue floating-rate debt at LIBOR + 2.95 percent or fixed-rate debt at 10.45 percent. Suppose Billy issues floating-rate debt and Kidd issues fixed-rate debt. They are considering a swap in which Billy will make a fixed-rate payment of 7.95 percent to Kidd, and Kidd will make a payment of LIBOR to Billy. a. What are the net payments of Billy...

  • Firm C has the ability to issue fixed-rate bonds in the Eurodollar market at a rate of 9%. Howeve...

    Firm C has the ability to issue fixed-rate bonds in the Eurodollar market at a rate of 9%. However, it has a strong preference for paying floating rate interest on their debt, which it could do directly at a rate of LIBOR + 0.25%. In contrast, Firm D has a harder time borrowing due their limp credit rating. It wishes to borrow longterm at a fixed rate, which it can do directly in the fixed-rate bond market at 11%. Alternatively,...

  • Company A can borrow fixed at 14.8 percent and floating at LIBOR percent. Company B can...

    Company A can borrow fixed at 14.8 percent and floating at LIBOR percent. Company B can borrow fixed at 16.2 percent and floating at LIBOR+ 0.35 percent. A financial intermediary charges a fee of 0.14 percent. Company A wishes to borrow floating and company B wishes to borrow fixed. Assume the gain is evenly split between the two parties and floating rate legs are LIBOR. Design the swap. What is the company A's fixed rate leg and company B's fixed...

  • E9.13 Interest Rate Swap: Profit and Default On July 1, 2020, Queen Corp. and Prince, Inc....

    E9.13 Interest Rate Swap: Profit and Default On July 1, 2020, Queen Corp. and Prince, Inc. entered into an interest rate swap on a notional amount of $1 million. They accepted the following offer of Intermediary: To Intermediary from Queen ..... To Intermediary from Prince...... To Queen from Intermediary .... To Prince from Intermediary......... LIBOR + 30 (floating) 2.4% (fixed) 2.3% (fixed) LIBOR + 20 (floating) ........ At inception of the swap, LIBOR = 2.3 percent. Due to an increase...

  • Explain why an Interest Rate Swap (assume LIBOR as the floating rate) with quarterly settlement (assume...

    Explain why an Interest Rate Swap (assume LIBOR as the floating rate) with quarterly settlement (assume 90 days per quarter) can be viewed as a strip of Eurodollar futures contracts. (Note: A strip is a sequence of ED futures with successive expirations) (b) The following table gives the bid and offer fixed rates in the swap market and the corresponding swap rates (i) Suppose that Company X can invest for 4 years at 4.5%. Recommend a floating rate, can it...

  • P9.14 Interest Rate Swap: Journal Entries and Valuation Johnson & Johnson (J&J) has $10,000,000 of floating...

    P9.14 Interest Rate Swap: Journal Entries and Valuation Johnson & Johnson (J&J) has $10,000,000 of floating rate debt, with interest at LIBOR + 120 bp adjusted quarterly, and an equivalent amount of 2-year fixed-rate debt investments yielding 4 percent annually. J&J classifies the investments as held-to-maturity. To match fixed rate financing with its fixed-rate investments, J&J swaps 3 percent fixed payments to intermediary in exchange for LIBOR + 120 bp on the notional amount of $10,000,000 for 2 years, and...

  • Consider a plain vanilla fixed for floating interest rate swap with a notional principal of 4,100,000...

    Consider a plain vanilla fixed for floating interest rate swap with a notional principal of 4,100,000 and annual payments. Initially the swap was supposed to last for five years and now three years remain. If the initial fixed rate is 0.09, LIBOR is 0.08, and the year three payment was just made (two years of payments remain on the swap), What is the absolute value of the swap?

  • a) ABC Ltd is interested to sell an existing fixed-for-floating interest rate swap to one of...

    a) ABC Ltd is interested to sell an existing fixed-for-floating interest rate swap to one of its corporate clients. Under the existing swap, ABC Ltd pays 10% pa and receive 3-month LIBOR on a $10 million principal. Cash flows are exchanged every quarter. The swap has a remaining life of 16 months. Data shows that the 3-month LIBOR rate 1 month ago was 11.8% pa; 2 months’ ago it was 12% pa; 3 months’ ago it was 12.2% pa and...

  • Company A can borrow fixed at 13.3 percent and floating at LIBOR+ 0.6 percent. Company B...

    Company A can borrow fixed at 13.3 percent and floating at LIBOR+ 0.6 percent. Company B can borrow fixed at 12.1 percent and floating at LIBOR+ 0 percent. If a financial intermediary charges a fee of 0.12 percent, what is the gain to each party to the swap? Assume the gain is evenly split between the two parties. 0.84 percent 0.3 percent 0.24 percent 0.36 percent Show Work Please

  • Company A, a low-rated firm, desires a fixed-rate, long-term loan. A currently has access to floating...

    Company A, a low-rated firm, desires a fixed-rate, long-term loan. A currently has access to floating interest rate funds at a margin of 0.5% over LIBOR. Its direct borrowing cost is 13% in the fixed-rate bond market. In contrast, company B, which prefers a floating-rate loan, has access to fixed-rate funds in the Eurodollar bond market at 11% and floating rate funds al LIBOR + 1.5% How can A and B use a swap to advantage?

ADVERTISEMENT
Free Homework Help App
Download From Google Play
Scan Your Homework
to Get Instant Free Answers
Need Online Homework Help?
Ask a Question
Get Answers For Free
Most questions answered within 3 hours.
ADVERTISEMENT
ADVERTISEMENT
ADVERTISEMENT