Companies A and B are able to receive the following rates per annum on a $10 million,5-year investment, as a function of whether the investment returns a fixed or floating rateof interest:Fixed rate Floating rateCompany A 5.0Company B | 5.6SOFR+20 basis pointsSOFRCompany A requires a fixed-rate investment and company B requires a floating-rate invest-ment. Design a swap that will net a bank, acting as an intermediary, 30 basis points andwill appear equally attractive to each company.

Swaps are one of the types of financial derivatives which are used to exchange one underlying asset…

Companies A and B are able to receive the following rates per annum on a $10 million, 5-year investment, as a function of whether the investment returns fixed or floating rate of interest: Fixed rate 5.0 Company A Company B 5.6 Floating rate SOFR+20 basis points SOFR Company A requires a fixed-rate investment and company B requires a floating-rate invest- ment. Design a swap that will net a bank, acting as an intermediary, 30 basis points and will appear equally attractive to each company.

Companies A and B are able to receive the following rates per annum on a $10 million, 5-year investment, as a function of whether the investment returns fixed or floating rate of interest: Fixed rate 5.0 Company A Company B 5.6 Floating rate SOFR+20 basis points SOFR Company A requires a fixed-rate investment and company B requires a floating-rate invest- ment. Design a swap that will net a bank, acting as an intermediary, 30 basis points and will appear equally attractive to each company.

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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(C) US Bank is considering investing in a three years' project in Europe country. The project would require an initial investment of $750,000 and it is expected to generate €80,000, €100,000 and €150,000 in year one until three, respectively. The business risk will be identical to the firm's existing line of business in the euro-zone, the required rate of return in the euro-zone is 18 percent. The exchange rate is $1.20/€ where the dollar also shows appreciating by one percent for every year. Determine the Net Present Value (NPV) in dollar currency for this project and justify.
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
Company A (a U.S. MNC) wants to borrow £10,000,000 at a fixed rate for five year. Company B (a U.K. MNC) wants to borrow $16,000,000 at a fixed rate for five year. Today's exchange rate is £1- $1.6. The information below summarizes what each company can do without using swaps. Company A Company B $ Loans 8 10.6 £ Loans 11.6 12.4 If Company A wants to save 0.3% of the £10,000,000 loan through a Swap Bank, and If Company B wants to save 0.2% of the $16,000,000 loan through a Swap Bank. How much can the Swap bank earn on pound (£) loans (in terms of %) after meeting Company A and Company B's demand? (if your answer is 1.34%, just enter "1.34". If your answer is -1.34%, just enter"-1.34").
Company A borrows $2 million at Libor + 3% for five years and Company B takes a $2 million five-year loan at a fixed 7% interest rate. The two companies enters into an interest rate swap arrangement, where Company A will pay Company B a fixed 6% interest rate on a notional $2 million and Company B will pay Company A Libor + 2% on a notional $2 million. What has been accomplished? Question 16 options: Both companies have been able to link the payment to Libor Company A has achieved payments mirroring a fixed interest rate while Company B will be paying a floating rate Company A has achieved payments mirroring a floating interest rate while Company B has achieved a fixed rate Both companies will be paying the same interest rate for the duration of the loan
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.
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

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