Company A and B has been offered the following rates per annum on a £10 million 5-year loan. Company A B Fixed (%) 5 6 Floating (%) LIBOR + 1.2 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

Company A and B has been offered the following rates per annum on a £10 million 5-year loan. Company A B Fixed (%) 5 6 Floating (%) LIBOR + 1.2 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

Intermediate Financial Management (MindTap Course List)

13th Edition

ISBN:9781337395083

Author:Eugene F. Brigham, Phillip R. Daves

Publisher:Eugene F. Brigham, Phillip R. Daves

Chapter24: Enterprise Risk Management

Section: Chapter Questions

Problem 10MC

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Two companies, Company A and Company B, are looking to enter into an interest rate swap agreement. Company A Company B Fixed rate 5% 6% Floating Rate 3-month LIBOR plus 1% 3-month LIBOR plus 1.5% Suppose that company A requires a floating-rate borrowing and company B requires a fixed- rating borrowing. A financial institution is planning to arrange a swap and requires 20bps spread. If benefits are equally shared both companies, what rate of interest will A and B pay?
Counterparty A can borrow from the floating rate market at LIBOR + 0.5% and Counterparty B can borrow from the Eurobond market at 7%. If Counterparty A pays 7.35% into the swap and Counterparty B pays the LIBOR rate plus 0.5% into the swap, then the overall cost to borrow by Counterparty B is: a. 7.85% b. LIBOR + 0.5% С. 7% d. LIBOR + 7.5% е. 7.35%
Company A wants to borrow US Dollar (USD) at a floating rate of interest and Company B want to borrow Australian Dollar (AUD) at a fixed rate of interest. They have been quoted the following rates by Bank C. USD AUD Company A LIBOR +0.5% 5.0% Company B LIBOR+1.0% 6.5% Develop an interest rate swap that will net the bank 50 basis point spread and will appear equally attractive to Company A and Company B. Explain your answer.
Company X and Company Y have been offered the following rates for a 10 million dollar investment. Fixed Rate Floating Rate Company X 3.5% 3-month LIBOR plus 10bp Company Y 4.5% 3-month LIBOR plus 30bp Suppose that Company X invests floating and company Y invests fixed. If they enter into a swap with each other where the apparent benefits are shared equally, what is the interest rate that company Y will get after entering the swap? 3-month LIBOR-10bp 3.9% 3-month LIBOR+70bp 4.9%
Tyson Inc. is entering into a 3-year pay-euros and receive-dollars cross currency swap. The 3-year swap interest rates are quoted in the table below. At what rate will Tyson receive dollars and at what rate will Tyson pay euros? Question 8 options: Receive at 2.28% and pay at 1.89% Receive at 2.23% and pay at 1.95% Receive at 2.28% and pay at 1.95% Receive at 2.23% and pay at 1.89%
Suppose that at the present time, one can enter 5-year swaps that exchange LIBOR for 5%. An off-market swap would then be defined as a swap of LIBOR for a fixed rate other than 5%. For example, a firm with 11% coupon debt outstanding might like to convert to synthetic floating-rate debt by entering a swap in which it pays LIBOR and receives a fixed rate of 11%. What up-front payment will be required to induce a counterparty to take the other side of this swap? Assume notional principal is $95 million. (Do not round intermediate calculations. Round your final answer to the nearest dollar amount.)
Consider the borrowing rates for Parties A and B. A wants to finance a $100,000,000 project at a fixed rate. B wants to finance a $100,000,000 project at a floating rate. Both firms want the same maturity, 5 years. Firm A B Fixed Rate $ 10.3% $ 8.9% Prime + 1/2% Floating Prime + 1% Construct a mutually beneficial interest only swap that makes money for A, B, and the swap bank in equal measure. Assume that Party B pays prime rate to swap bank while the swap bank pays prime rate to party A. In that situation, what rate should the swap bank pay to Party B. Show all work. A) 9% B) 8.7% C) 8.9% D) Prime + 1% E) None of the above
Company A can borrow at either an 8.5% fixed rate or a floating rate of prime + 1.75% Company B can borrow at either a floating rate of prime + 1.25% or a fixed rate of 8.65% Company A prefers a floating rate and Company B prefers a fixed rate. Which one of the following terms would be acceptable to both Company A and B if they opted to enter an interest rate swap? a) 8.6% fixed for prime + 1.2% floating b) 8.5% fixed for prime + 1.75% floating c) 8.65% fixed for prime + 1.25% floating d) 8.6% fixed for prime + 1.3% floating e) 8.65% fixed for prime + 1.3% floating
Suppose that at the present time, one can enter 5-year swaps that exchange SOFR for 4%. An off-market swap would then be defined as a swap of SOFR for a fixed rate other than 4%. For example, a firm with 8% coupon debt outstanding might like to convert to synthetic floating- rate debt by entering a swap in which it pays SOFR and receives a fixed rate of 8%. What up- front payment will be required to induce a counterparty to take the other side of this swap? Assume notional principal is $110 million. Note: Do not round intermediate calculations. Round your final answer to the nearest dollar amount. X Answer is complete but not entirely correct. Up-front payment 2,174,000 X $
Company A can borrow at either an 8.5% fixed rate or a floating rate of prime + 1.75% Company B can borrow at either a floating rate of prime + 1.25% or a fixed rate of 8.65% Company A prefers a floating rate and Company B prefers a fixed rate. Which one of the following terms would be acceptable to both Company A and B if they opted to enter an interest rate swap? Multiple Choice 8.65% fixed for prime + 1.3% floating 8.5% fixed for prime + 1.75% floating 8,6% fixed for prime + 1.3% floating 8,65% fixed for prime + 1.25% floating 8.6% fixed for prime + 1.2% floating
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 12.5% 16.0% Floating rate borrowing cost SOFR+0.72% SOFR+1.72% Required: a. Calculate the quality spread differential (QSD). b-1. Develop an interest rate swap in which both Alpha and Beta have an equal cost savings in their borrowing costs. Assume Alpha desires floating rate debt and Beta desires fixed rate debt. No swap bank is involved in this transaction. What rate should Alpha pay to Beta? b-2. What rate will Beta pay to Alpha? b-3. Calculate the all-in cost of borrowing for Alpha and Beta, respectively.
Vijay