Companies A and B have been offered the following rates per annum on a $5 million 10-year loan. USD Swiss Franc Company X Company Y LIBOR +0.3% LIBOR +0.8% 10% 11.4% Company X requires a floating-rate loan; company Y requires a fixed-rate loan. Design a swap that will net a bank, acting as intermediary, 20 basis points per annum and will appear equally attractive to X and Y. a) Illustrate the swap with a cash flow diagram. Mark the currency and interest rate clearly. b) Determine the effective borrowing costs for X and Y.

Companies A and B have been offered the following rates per annum on a $5 million 10-year loan. USD Swiss Franc Company X Company Y LIBOR +0.3% LIBOR +0.8% 10% 11.4% Company X requires a floating-rate loan; company Y requires a fixed-rate loan. Design a swap that will net a bank, acting as intermediary, 20 basis points per annum and will appear equally attractive to X and Y. a) Illustrate the swap with a cash flow diagram. Mark the currency and interest rate clearly. b) Determine the effective borrowing costs for X and Y.

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

See similar textbooks

Similar questions

Two companies can borrow from the banking sector on the following terms (please check the attached table below). What is the combined rate paid if Company A borrows at the floating rate and Company B borrows at a fixed rate? Moreover, which arrangement allows a mutual reduction in borrowing rate that both parties can share and by how much?
An Austra ian companv has decided to issue a 90-dav bank-accepted bill domestically to raise additionafunding of S18000 to buy equipment. If the bank has agreed to discount the bill at a yield of 8.5% per annum,which of the following values will the face value of the bill be closest to? a.S17913.31 b.S17641.62 O c.S18744.81 d.$18377.26 e.s17630.48 f.s18000.00 g.S18382.50.
Suppose that the term structure of risk-free interest rates is flat in the United States and Australia. The USD interest rate is 5.9% per annum and the AUD rate is 5.7% per annum. The current value of the AUD is 0.57 USD. Under the terms of a swap agreement, a financial institution pays 2.0% per annum in AUD and receives 5.0% per annum in USD. The principals in the two currencies are $12 million USD and 20 million AUD. Payments are exchanged every year, with one exchange having just taken place. The swap will last two more years. What is the USD value of the swap to the financial institution? Assume all interest rates are continuously compounded. Enter your answer rounded to the nearest integer,
An engineer prepares a report to evaluate a project using PW and IRR. Just before submitting the report, he spills coffee on it, making the first digit of the 2-digit IRR unreadable. The second digit is a 2. The PW is negative and MARR is 15 percent. He doesn’t have time to redo the analysis. Can you help him figure out the IRR?
An American rm owes SFr 6, 000, 000.00 payable in one year. The current spot it$1.3750/SFr. A Swiss bank is paying 1.50% on deposits or will lend at 6.50% AU.S. bank is paying 4.50% or will lend at 8.00%. The rm would like to hedge this exposurewith money market hedging. How much do they need to borrow today
Hedging using Swap You want to borrow in U.S. dollars at a fixed rate of interest to match with your investment cash flows. Bank A offers you to borrow in US dollars at 7% or in Australian dollars at LIBOR + 0.5% per annum (adjusted for the differential impact of taxes). You found that Bank A also offer another customer who requires a floating-rate loan to borrow in US dollars at 7.5% or in Australian dollars at LIBOR + 2.0% per annum. Bank A can arrange a swap between you and the other customer with a net 20-basis-point spread. Design a swap that minimizes your borrowing costs and appears equally attractive to you and the other customer. What rates of interest will you and that customer end up paying? (Provide explanation, list your calculation process and use figure to illustrate the swap structure).
Please help and show calculation. Consider two companies: Honda and IBM. Honda wants to borrow US$ for the following 5 years at a fixed rate, while IBM wants to borrow Yen also for the following 5 years at a fixed rate. The rates available to two companies in US$ and Yen markets are shown below. US$ Yen Honda 8.0% 7.6% IBM 5.4% 6.6% 1. What is the total gain from the currency swap? Which firm has the comparative advantage in US dollar market, IBM or Honda?
Company A and B has been offered the following rates per annum on a £10 million 5 - year loan. Company Fixed (%) Floating (%) A 5 LIBOR + 1.2 B 6 LIBOR + 0.3 Company A requires a floating rate loan, whereas company B requires a fixed rate loan. In which market does company A have a comparative advantage? Design a swap that will give a bank, acting as an intermediary 0.5% p.a. and that will appear equally attractive to both companies. Explain how to achieve this, using diagrams and text. (15 Marks) (Please answer without use of excel)
EUROCREDIT LOAN:A Swiss sporting goods company borrows in yen in the Eurocredit market at a rate of 4.94 percent from Bank of America using a three-month rollover loan. Bank of America assigns a default risk premium of 1.93 percent on the loan, and the country risk is an additional 0.76 percent. The bank can borrow funds in the Euromarket at the three-month LIBOR rate of 0.30 percent. What is Bank of America’s gross profit margin on this loan?
Assume the time from acceptance to maturity on a $2,280,000 banker’s acceptance is 90 days. Further assume that the importing bank’s acceptance commission is 1.25 percent and that the market rate for 90-day B/As is 7 percent. Determine the amount the exporter will receive if he holds the B/A until maturity and also the amount the exporter will receive if he discounts the B/A with the importer’s bank.
A UK company owes an American company $100,000 due to be paid in three months. The company wishes to avoid exchange rate risk, so borrows enough in sterling now and converts it immediately to dollars which are invested to bring in the required amount in three months' time. The following information is available: Spot rate $/£ 1.7755 - 1.7765 3-month interest rates: Sterling 3.250% US dollar 2.425% How much will the UK company have to borrow now to clear the debt in three months? A. £54,958 B. £54,989 £56,744 D. £56,775 C.
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?

SEE MORE QUESTIONS

Recommended textbooks for you

Essentials Of Investments

Finance

ISBN:

9781260013924

Author:

Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:

Mcgraw-hill Education,

FUNDAMENTALS OF CORPORATE FINANCE

Finance

ISBN:

9781260013962

Author:

BREALEY

Publisher:

RENT MCG

Financial Management: Theory & Practice

Finance

ISBN:

9781337909730

Author:

Brigham

Publisher:

Cengage

Foundations Of Finance

Finance

ISBN:

9780134897264

Author:

KEOWN, Arthur J., Martin, John D., PETTY, J. William

Publisher:

Pearson,

Fundamentals of Financial Management (MindTap Cou…

Finance

ISBN:

9781337395250

Author:

Eugene F. Brigham, Joel F. Houston

Publisher:

Cengage Learning

Corporate Finance (The Mcgraw-hill/Irwin Series i…

Finance

ISBN:

9780077861759

Author:

Stephen A. Ross Franco Modigliani Professor of Financial Economics Professor, Randolph W Westerfield Robert R. Dockson Deans Chair in Bus. Admin., Jeffrey Jaffe, Bradford D Jordan Professor

Publisher:

McGraw-Hill Education

Essentials Of Investments

Finance

ISBN:

9781260013924

Author:

Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:

Mcgraw-hill Education,

FUNDAMENTALS OF CORPORATE FINANCE

Finance

ISBN:

9781260013962

Author:

BREALEY

Publisher:

RENT MCG

Financial Management: Theory & Practice

Finance

ISBN:

9781337909730

Author:

Brigham

Publisher:

Cengage

Foundations Of Finance

Finance

ISBN:

9780134897264

Author:

KEOWN, Arthur J., Martin, John D., PETTY, J. William

Publisher:

Pearson,

Fundamentals of Financial Management (MindTap Cou…

Finance

ISBN:

9781337395250

Author:

Eugene F. Brigham, Joel F. Houston

Publisher:

Cengage Learning

Corporate Finance (The Mcgraw-hill/Irwin Series i…

Finance

ISBN:

9780077861759

Author:

Stephen A. Ross Franco Modigliani Professor of Financial Economics Professor, Randolph W Westerfield Robert R. Dockson Deans Chair in Bus. Admin., Jeffrey Jaffe, Bradford D Jordan Professor

Publisher:

McGraw-Hill Education

SEE MORE TEXTBOOKS