Fearing that market interest rate will fluctuate, Bethlehem with credit rating of Baa decides to engage in an interest rate swaps for their 100 million variable debt with US steel in January 1, 2017. US steel, with credit rating of Aaa, has long term fixed debt of $100 million at the time of transaction. According to the swaps contract, Bethlehem will pay 8 percent interest rate to US steel and, in turn US steel pays T-bill minus 0.25% to Bethlehem steel. At the time of swap transaction bond market quotes the following interest rates for these tow credit ratings on annual basis.
Baa Aaa
Fixed 9% 7.5%
Variable T+ 0.25% T
1.Which company is exposed to the market interest rate fluctuation after this transaction? Why?
2.How much do Bethlehem and US steel save interest expenses for 2017 with interest rate swaps contract? Please show your computations.
3.Discuss the impact of this derivative on
a. Balance sheet:
b. Income statements:
2 Bethlemhem saving out of swap is as follow
Cost under no swap for Bethlemhem and US Steel before SWAP =(T+ 0.25%) + 7.5% that is T+ 7.75%
Cost post Swap for Bethlemhem and US Steel = (T- 0.75%) + 8.5% that is T + 7.75 %
That means there is no overall saving of this swap
3 after this swap profit and loss impact is nil while balance sheet of Bethlemhem and US Steel before show Fixed and fluctuating obligation while booking year end obligations.
Fearing that market interest rate will fluctuate, Bethlehem with credit rating of Baa decides to ...
CREDIT RATING:
Assign a hypothetical credit rating using the ratios
above.
(note: credit ratings are: Aaa, Aa, A, Baa, Ba, B, Caa-C)
please show which credit rating it is and explain why you got
that credit rating. Thank you!
RATIOS EBITA/Average Assets Net Income Taxes Interest Expense + Amortization ЕBITA 158,536+23,333+(-27,435)+110,749 0.0656 6.56% - (1,675,614+1,581,603)/2 EBITA Interest Expense Net Income Taxes Interest Expense Amortization ЕBITA 158,536 23,333 + (-27,435) 110,749 -8.90 -27,435 ЕBITA Margin EBITDA Margin = EBITDA / Total...
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,...
Monty Company issues a 4-year, 7.50% fixed-rate interest only, nonprepayable $ 1,100,000 note payable on December 31, 2016. It decides to change the interest rate from a fixed rate to variable rate and enters into a swap agreement with M&S Corp. The swap agreement specifies that Monty will receive a fixed rate at 7.50% and pay variable with settlement dates that match the interest payments on the debt. Assume that interest rates have declined during 2017 and that Monty received $ 10,500...
Modified duration gap of 3 year and market value of assets of 3 million. Manager expects interest rates to go up from 9% to 10%. Question: show how can the manager immunize the bank assets from interest rate change by using following 2 Swaps: Swap 1: pay T-bill +1% in exchange for 7% fixed rate. Swap 2: pay fixed rate of 7% in exchange for a floating rate of T-bill +1%. Assume modified duration on 7% fixed rate security is...
Exercise A-5 (Algo) Derivatives; interest rate swap; fixed rate debt; extended method (LOA-6) pints On January 1, 2021, LLB Industries borrowed $360,000 from Trust Bank by issuing a two-year, 10% note, with interest payable quarterly. LLB entered into a two-year interest rate swap agreement on January 1, 2021, and designated the swap as a fair value hedge. Its intent was to hedge the risk that general interest rates will decline, causing the fair value of its debt to increase. The...
Exercise A-6 Derivatives; interest rate swap; fixed-rate debt; fair value change unrelated to hedged On January 1, 2018, LLB Industries borrowed $290,000 from trust Bank by issuing a two-year, 8% note, with interest payable quarterly. LLB entered into a two-year interest rate swap agreement on January 1, 2018, and designated the swap as a fair value hedge. Its intent was to hedge the risk that general interest rates will decline, causing the fair value of its debt to increase. The...
True or False? 1. Pure credit swaps, interest rate swaps, and spot contracts are all examples of derivative securities. 2. The sole purpose of derivatives is the hedge against risk. 3. In a forward contract, the future exchange of assets is conducted through a mark-to-market process. 4. The Liquidity Coverage Ratio (LCR) provides a measure for the amount of liquid assets a bank needs to have relative to its net cash outflows and the ratio must be over 100%.
Should Financial Institutions Engage in Interest Rate Swaps for Speculative Purposes? Credit default swaps were once viewed as a great innovation for making mortgage markets more stable. Yet, the swaps were sometimes criticized for making the credit crisis worse. Why? Miami Mutual Bank* purchases a two-year interest rate cap for a fee of 3 percent of notional principal valued at $10 million, with an interest rate ceiling of 11 percent and LIBOR as the index representing the market interest rate....
Question- List and discuss Swap contract method that employed by
Toyota company to manage their foreign currency transaction
exposures.( 300 words )
Note - please write “ foreign currency “ word on each sentence
or paragraph with related Toyota company which use Swap contract
method .
- citations need
- references need
- use more information from Google and attach photos
file
(1)(b) Method (B)- Swap Contract (20 marks 320 words) Toyota Toyota Motor Corporation, Japanese parent company of the...
Cullumber Corp. issued a $2–million, four–year, 7.65% fixed-rate interest only, non-prepayable bond on December 31, 2019. Cullumber later decided to hedge the interest rate and change from a fixed rate to variable rate, so it entered into a swap agreement with M&S Corp. The swap agreement specified that Cullumber will receive a fixed rate of 7.65% and pay variable rate interest with settlement dates that match the interest payments on the instrument. Assume that interest rates declined during 2020 and...