Alpha and Beta Companies can borrow for a five-year term at the following rates: Moody's credit rating Fixed-rate borrowing cost Floating-rate borrowing cost Alpha Aa % 10.8% LIBOR Beta Baa 12.6% LIBOR + 1% Assuming more realistically that a swap bank is involved as an intermediary. Assume the swap bank is quoting five-year dollar interest rate swaps at 11.3-11.1 percent against LIBOR flat. Calculate the quality spread differential (QSD). (Enter your answers as a percent rounded to 1 decimal places.) Quality spread differential

Alpha and Beta Companies can borrow for a five-year term at the following rates: Moody's credit rating Fixed-rate borrowing cost Floating-rate borrowing cost Alpha Aa % 10.8% LIBOR Beta Baa 12.6% LIBOR + 1% Assuming more realistically that a swap bank is involved as an intermediary. Assume the swap bank is quoting five-year dollar interest rate swaps at 11.3-11.1 percent against LIBOR flat. Calculate the quality spread differential (QSD). (Enter your answers as a percent rounded to 1 decimal places.) Quality spread differential

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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Below are two T-Bill purchases: A T-Bill with a face value of $900,000 and current market price of $850,000. The maturity date is in 250 days. A T-bill has a face value of $600,000, a current market price of $570,000 and matures in 200 days. Please calculate for both T-bill purchases based on the following: (a) What is the bank discount yield? Calculate the holding period yield Calculate the Effective Annual Yield Calculate the Money Market Yield (b)Explain why the Effective Annual Yield is greater than the Bank Discount Yield
Commercial bank A and Savings bank B entered into a swap contract. The swap has a notional principal amount of $200 million and calls for Commercial Bank A to make annual floating interest rate payment of LIBOR minus 0.75% to Savings Bank B. In return, Savings Bank B pays fixed 8% interest rate to Commercial Bank A. If LIBOR is 8%, what is the net payment?
Finance Suppose two companies, Firm A and B, both wish to borrow $10 million for five years and have been offered the following rates firm A fixed rate 4%, firm A floating rate six month LIBOT -0.1% firm B, fixed 5.2% floating six months libor +0.6% Enter into a swap agreement to exchange interest-rate payments such that: – Firm A ends up with floating-rate funds. – Firm B ends up with fixed-rate funds. explain how much A and b have after a swap?With a swap, Firm A now pays LIBOR − 0.35% With a swap, Firm B now pays 4.95%. Explain how -0.35% and 4.95% are attained with proper working
Answer a) and b) Problem 3: Interest Swap Companies A and B have been offered the following rates per annum on a $50 million five-year loan: Company A Company B Floating LIBOR +0.7% LIBOR +1.0% Fixed 6.0% 7.5% Company A requires a floating-rate loan and company B requires a fixed-rate loan. a) Design a swap that will net a bank, acting as an intermediary, 30 basis points (0.3%) per annum and that is equally attractive to the two companies. Illustrate the swap with a diagram. b) Determine the effective financing costs for A and B.
You can borrow CAD (Canadian dollar) at 8 percent, which is 2 percent above the swap rate, or at CAD Libor + 1 percent. If you want to borrow at a fixed-rate, what is the best way: direct, or synthetic (that is, using a floating-rate loan and a swap)? Direct borrowing would be to borrow at a fixed rate of 8 percent. Synthetic fixed-rate cad borrowing would be to borrow CAD at a floating rate of Libor + 1 percent and arrange a swap where you pay fixed 6 percent CAD in exchange for receiving CAD Libor.
Netflix company has entered into a plain vanilla interest rate swap on $2,500,000 notional principal. The company pays fixed rate of 7.0% on payments that occur at 60-day intervals. Six payments remain with the next one due in exactly 60 days. On the other side of the swap, the company receives payments based on the LIBOR rate. Describe the transaction that occurs between the company and the dealer at the end of the first period if the appropriate LIBOR rate is 8.5%.
Alpha and Beta Companies can borrow for a five - year term at the following rates: Alpha Beta Moody's credit rating Aa Baa Fixed - rate borrowing cost 10.3% 12.5% Floating - rate borrowing cost LIBOR LIBOR + 1.1% If there is a swap bank involved and earns 20% of the swap's total benefit. Alpha wants to borrow through floating debts and desires 70% of the total benefit from the swap, and Beta takes the rest of the swap benefit. What is the all-in-cost for Beta through the swap? (if your answer is 10.1%, just enter "10.1").
Suppose you have a 2.5-year remaining on an interest rate swap with a notionalprincipal of $10, 000, 000 between Company A and Company B. Company A pays fixed rateand Company B pays the float rate. Fixed and float payments are exchanged every year andthe last payment was exchanged 6 months ago. The fixed rate is 3.5% per annum, and thefloating rate is tied to the annual LIBOR. The previous 1-year LIBOR rate, set 6 months ago,is 2.75%, 6 month LIBOR is 3.25%. the 1.5-year LIBOR is 3.25%, and the 2.5-year LIBOR is3.50%.Calculate the present value of the fixed and floating legs of the swap, and determine the swap’snet present value from Company A’s perspective. Assume annual compounding for discounting.
Suppose that a bank has agreed to the following terms of an interest rate swap: - The notional principal is CAD 300 million and the remaining life of the swap is 11 months. - The bank pays 8% per annum, and receives three-month LIBOR. - Payments are exchanged every three months. - The swap (fixed) rate is 11% per annum for all maturities. - The three-month LIBOR rate a month ago was 12.5% per annum. All rates are compounded quarterly. Estimate the value of the swap using a) a bond-price valuation method, and b) a FRAS-based method?
15. The table below presents the costs of borrowing for Caterpillar and Tesla, and the a Swap Bank quote against LIBOR. Caterpillar would like to get a $5,000,000.00 floating rate loan. Tesla would like to get a $5,000,000.00 fixed rate loan. How much can Tesla save each year by entering a swap agreement? (a) $37,000 (b) $9,500 (c) $8,000 (d) $27,500 Fixed-Rate Borrowing Cost Floating-Rate Borrowing Cost Caterpillar Tesla 3.00 6.50 LIBOR LIBOR +2.60 Swap Bank Quote Bid Ask 3.19% 3.74% (e) None of the above
A Bank offers both loans and deposits at a nominal interest rate of 5% that is continuously compounded. (a) What is the effective rate offered by the bank? Give your answer to 3 digits. Do not write the % sign. For example, if your answer is 4.15% then write 4.15. Answer: (b) The bank also offers a 3-year bond with face value £10000, redeemable at par, with 10% annual coupons. What is the final payment of that bond? Do not enter the £ sign. Answer: (C) T sign. Answer: Assuming there are no arbitrage opportunities, what is the price of the above bond? Give your answer to five valid digits. Do not enter the £
3. Suppose that a bank has agreed to the following terms of an interest rate swap: - The notional principal is CAD 300 million and the remaining life of the swap is 11 months. - The bank pays 8% per annum, and receives three-month LIBOR. - Payments are exchanged every three months. - The swap (fixed) rate is 11% per annum for all maturities. - The three-month LIBOR rate a month ago was 12.5% per annum. All rates are compounded quarterly. Estimate the value of the swap using a) a bond-price valuation method, and b) a FRAS-based method?

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