4. Due to an urgent working capital need, a company gets a 3-month bank credit at an annual rate of 22%. They expect a decline in interest rates and do not want to have borrowed at a high rate. Explain how they can use TLREF OIS contracts to reduce their interest cost. The current fixed rate of OIS is 19% with quarterly settlement. Calculate the net interest cost if, as of 3 months from now, a. The compounded (in-arrears) average of overnight TLREF rates over the 3-month period turns out to be 18% per annum (that is, the TLREF Index goes up from 100 to 104.2) - expected good news b. The average turns to be 20% per annum - unexpected bad news

4. Due to an urgent working capital need, a company gets a 3-month bank credit at an annual rate of 22%. They expect a decline in interest rates and do not want to have borrowed at a high rate. Explain how they can use TLREF OIS contracts to reduce their interest cost. The current fixed rate of OIS is 19% with quarterly settlement. Calculate the net interest cost if, as of 3 months from now, a. The compounded (in-arrears) average of overnight TLREF rates over the 3-month period turns out to be 18% per annum (that is, the TLREF Index goes up from 100 to 104.2) - expected good news b. The average turns to be 20% per annum - unexpected bad news

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter16: Working Capital Policy And Short-term Financing

Section: Chapter Questions

Problem 33P

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Question

4. Due to an urgent working capital need, a company gets a 3-month bank credit at an annual
rate of 22%. They expect a decline in interest rates and do not want to have borrowed at a
high rate. Explain how they can use TLREF OIS contracts to reduce their interest cost. The
current fixed rate of OIS is 19% with quarterly settlement. Calculate the net interest cost if,
as of 3 months from now,
a. The compounded (in-arrears) average of overnight TLREF rates over the 3-month
period turns out to be 18% per annum (that is, the TLREF Index goes up from 100 to
104.2) – expected good news
b. The average turns to be 20% per annum – unexpected bad news

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