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
Chapter16: Working Capital Policy And Short-term Financing
Section: Chapter Questions
Problem 33P
Related questions
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](/v2/_next/image?url=https%3A%2F%2Fcontent.bartleby.com%2Fqna-images%2Fquestion%2Fb80641e7-096d-4a06-ad11-5c9235ca65de%2Fab81ec17-7b5f-49df-86fa-791bbc150d54%2Flbcnaer_processed.jpeg&w=3840&q=75)
Transcribed Image Text: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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