Compare the required credit risk capital under Basel I and Basel Il for the following set of arrangements.(a) A 2 year interest rate swap with a principal of $100 million traded with an AA rated company, currently worth 2.5 million(b) $30 million 3 year Treasury bond with a BBB rated OECD sovereign(c) $20 million claims secured by residential mortgages(d) A six month corporate loan of $ 25million to an A+ rated company

Credit risk capital requirement is a part of total capital of the bank. It is also known as the risk…

Compare the required credit risk capital under Basel I and Basel Il for the following set of arrangements. (a) A 2 year interest rate swap with a principal of $100 million traded with an AA rated company, currently worth 2.5 millon (b) $30 million 3 year Treasury bond with a BBB rated OECD sovereign (c) $20 million claims secured by residential mortgages (d) A six month corporate loan of $ 25million to an A+ rated company

Compare the required credit risk capital under Basel I and Basel Il for the following set of arrangements. (a) A 2 year interest rate swap with a principal of $100 million traded with an AA rated company, currently worth 2.5 millon (b) $30 million 3 year Treasury bond with a BBB rated OECD sovereign (c) $20 million claims secured by residential mortgages (d) A six month corporate loan of $ 25million to an A+ rated 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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D3) Finance ABC is currently paying 7.5% fixed rate on S$10m. ABC can borrow at LIBOR. XYZ is paying LIBOR + 0.8% on S$10m. XYZ can borrow fixed at 9.5%. ABC and XYZ agree to swap interest payments to take advantage of the arbitrage created by their respective interest rate differentials. Which of the following is correct? A. ABC ends up paying LIBOR - 0.6%, XYZ ends up paying 8.9% B. ABC ends up paying 7.5%, XYZ ends up paying LIBOR + 0.8% C. ABC ends up paying LIBOR, XYZ ends up paying 9.5% D. None of the above
Suppose that ABSs are created from portfolios of subprime mortgages with the following allocation of the principal to tranches: senior 80%, mezzanine 10%, and equity 10%. (The portfolios of subprime mortgages have the same default rates.) An ABS CDO is then created from the mezzanine tranches with the same allocation of principal. Losses on the mortgage portfolio prove to be 16%. What, as a percent of tranche principal, are losses on the mezzanine tranche of the ABS CDO? (a)50% (b)60% c)80% (d)100%
You are the manager of a £100 million portfolio, and you have 6 investment options: - First Mortgages: return 9% and risk score 3- Second Mortgages: return 12% and risk score 6- Personal Loans: return 15% and risk score 8- Commercial Loans: return 8% and risk score 2- Government Securities: return 6% and risk score 1- Saving Account: return 3% and risk score 0 The current regulation requires that the amount allocated in second mortgages and personal loans (combined) should not exceed the amount allocated in first mortages. Given this information: a) Ignoring the risk involved in the different investment options, what is the profit maximizing allocation of resources? What are the expected profits? b) Now, you have to consider the risk associated with the investments. The average risk of your portfolio cannot exceed 5. What is the profit maximizing allocation of resources? What are the expected profits?
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.
X Co. want to raise $100 million of 5-year debt in the Euro-market where interest is paid annually. It can obtain a 5-yr floating rate note with an interest rate of 1-year LIBOR + 2%. The 1-year LIBOR rate is currently 5%. To hedge the interest rate risk X Co. plans to enter into a collar with a cap rate of 6% and a floor rate of 4%. The notional principal of both the cap and floor is $100 million. The cap premium is 1.4% of the notional principal and the floor premium is 0.5% of the notional premium. What is the worst case all-in-rate that X Co. will pay in total? Answer options: 5.8% 5.2% 9.2% 8.2% 7.2%
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%.
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?
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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