5. Factors affecting interest rate swap pricing Suppose Liptenstein Company engages in a plain vanilla interest rate swap with Ziegler Company, where Liptenstein Company is the party making fixed interest rate payments. Suppose there are two scenarios: (1) prevailing market interest rates are 7% when the swap is created, and (2) prevailing market interest rates are 3% when the swaps are created. Under which scenario would you expect the fixed interest rate on the swap to be lower? Scenario 1 Scenario 2 Suppose Habersham Bank engages in a plain vanilla interest rate swap with Hedgington Bank, where Habersham Bank is the party making fixed interest rate payments. Suppose there are two scenarios: (1) 7 investors are willing to serve as the counterparty on the swap, and (2) 2 investors are willing to serve as the counterparty on the swap. Under which scenario would you expect the fixed interest rate on the swap to be lower? Scenario 1 Scenario 2 Suppose Maplewood Company engages in a plain vanilla interest rate swap with Hedgington Bank, where Maplewood Company is the party making fixed interest rate payments. Suppose there are two scenarios: (1) Hedgington Bank is based in a country that is known to be politically stable, and they have not missed a payment on debt obligations in over 30 years, and (2) Hedgington Bank is based in a country known for political instability and constantly makes late payments on debt obligations. Under which scenario would you expect the fixed interest rate on the swap to be lower? Scenario 1 O scenario 2
5. Factors affecting interest rate swap pricing Suppose Liptenstein Company engages in a plain vanilla interest rate swap with Ziegler Company, where Liptenstein Company is the party making fixed interest rate payments. Suppose there are two scenarios: (1) prevailing market interest rates are 7% when the swap is created, and (2) prevailing market interest rates are 3% when the swaps are created. Under which scenario would you expect the fixed interest rate on the swap to be lower? Scenario 1 Scenario 2 Suppose Habersham Bank engages in a plain vanilla interest rate swap with Hedgington Bank, where Habersham Bank is the party making fixed interest rate payments. Suppose there are two scenarios: (1) 7 investors are willing to serve as the counterparty on the swap, and (2) 2 investors are willing to serve as the counterparty on the swap. Under which scenario would you expect the fixed interest rate on the swap to be lower? Scenario 1 Scenario 2 Suppose Maplewood Company engages in a plain vanilla interest rate swap with Hedgington Bank, where Maplewood Company is the party making fixed interest rate payments. Suppose there are two scenarios: (1) Hedgington Bank is based in a country that is known to be politically stable, and they have not missed a payment on debt obligations in over 30 years, and (2) Hedgington Bank is based in a country known for political instability and constantly makes late payments on debt obligations. Under which scenario would you expect the fixed interest rate on the swap to be lower? Scenario 1 O scenario 2
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Transcribed Image Text:5. Factors affecting interest rate swap pricing
Suppose Liptenstein Company engages in a plain vanilla interest rate swap with Ziegler Company, where Liptenstein Company is the party making
fixed interest rate payments. Suppose there are two scenarios: (1) prevailing market interest rates are 7% when the swap is created, and (2)
prevailing market interest rates are 3% when the swaps are created. Under which scenario would you expect the fixed interest rate on the swap to be
lower?
Scenario 1
Scenario 2
Suppose Habersham Bank engages in a plain vanilla interest rate swap with Hedgington Bank, where Habersham Bank is the party making fixed
interest rate payments. Suppose there are two scenarios: (1) 7 investors are willing to serve as the counterparty on the swap, and (2) 2 investors are
willing to serve as the counterparty on the swap. Under which scenario would you expect the fixed interest rate on the swap to be lower?
Scenario 1
Scenario 2
Suppose Maplewood Company engages in a plain vanilla interest rate swap with Hedgington Bank, where Maplewood Company is the party making
fixed interest rate payments. Suppose there are two scenarios: (1) Hedgington Bank is based in a country that is known to be politically stable, and
they have not missed a payment on debt obligations in over 30 years, and (2) Hedgington Bank is based in a country known for political instability and
constantly makes late payments on debt obligations. Under which scenario would you expect the fixed interest rate on the swap to be lower?
Scenario 1
Scenario 2
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