2. Companies X and Y have been offered the following rates per annum on a $5 million 10-year loan: Fixed Rate Floating Company X Company Y 5.1% LIBOR 6.4% LIBOR-0.3% Company X requires a floating-rate loan; company Y requires a fixed-rate loan. Design a swap that will net a bank, acting as intermediary, 0.5% per annum and will appear equally attractive to X and Y.

Q: Define breakup value

A: The breakup value is the valuation of the company for liquidation in the market. It is best known as…

Q: Define stand by spares.

A: Current assets:   The assets of the company that cannot be converted into cash within a period of…

Q: Describe briefly how the HST remittance is calculated.

A: Harmonized sales tax remittance: The harmonized sales tax remittance is the amount of sales tax that…

Q: Define forward contract.

A: It is a form of derivative contract which is used as an agreement

Q: Briefly describe the connection and the difference between CAPM and Single Index Model (SIM).

A: Capital Asset Pricing Model or CAPM referred to as the relationship between the systematic risk and…

Q: Explain compound interest.

A: Compound interest.

Q: Describe the concept of “over-trading” using numeric example if appropriate.’

A: In the world of finance over trading is an important concept for businesses.

Q: Describe the revaluation model.

A: Introduction: The revaluation model stretches a business the option of carrying a fixed asset at its…

Q: Define derivatives

A: In Finance there are derivative contracts that derive its value from the underlying asset. This…

Q: Define Purchase return.

A: Financial accounting is the process of recording, summarizing, and reporting all the transactions in…

Q: Explain Pass-Through Rates, Yields, and Servicing Fee?

A: Pass-through rateA rate of interest being paid to the investors on the securitized asset after…

Q: Define ask quote (or ask price)

A: The recent price of stock or security at which stock or security is purchased and sold in the stock…

Q: Define asymmetric hedge

A: A strategy that helps to reduce the loss which occurs from the movement of the asset's price is term…

Q: Define conversion price

A: Introduction: The conversion price is stated when the security is delivered. In case of a…

Q: Define arbitrage

A: Introduction: Usually, an arbitrage opportunity is used when there is the option of purchasing an…

Q: Explain replacement chain (common life) approach

A: The replacement chain method compares two or more mutually exclusive capital proposals that possess…

Swaps

A swap is a derivative contract in which two parties are agreed to exchange their cash flows from two different financial instruments for a defined period. In swap contracts, cash flows from one financial instrument are fixed and cash flow from other financial instruments is variable based on the interest rate, exchange rate, and commodity price. Swap contracts are transacted in an over-the-counter system. Swap contracts are utilized to hedge risk and mitigate loss.