Consider a contract that caps the LIBOR interest rate on $10,000 at 8% per annum (with quarterly compounding) for 3 months starting in one year. This is a caplet and could be one element of a cap. Suppose the LIBOR/Swap curve zero curves are flat at 7% per annum with quarterly compounding, and the volatility of The 3-month forward rate underlying the caplet is 20% per annum. What is the price of the caplet? O A-5.19 OB. 6.84 OC.4.43 OD-5.75

Consider a contract that caps the LIBOR interest rate on $10,000 at 8% per annum (with quarterly compounding) for 3 months starting in one year. This is a caplet and could be one element of a cap. Suppose the LIBOR/Swap curve zero curves are flat at 7% per annum with quarterly compounding, and the volatility of The 3-month forward rate underlying the caplet is 20% per annum. What is the price of the caplet? O A-5.19 OB. 6.84 OC.4.43 OD-5.75

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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Let’s say we have a situation where all 12-month LIBOR forward rates at 8% per annum with annual compounding. All cap volatilities are 16%. Estimate the difference between the way a sophisticated trader and an unsophisticated trader would value a LIBOR-in-arrears swap where payments are made annually and the life of the swap is 5 years and 10 years. Also, assume a notional principal of $1 million and no difference between the risk-free discount rate and LIBOR rates.
Consider a one-year loan with a face value of S100,000and a coupon rate of 20%. The loan requires payment ofaccrued interest and one-quarter (25%) of the principaat the end of six months. The remaining principal andaccrued interest are due at the end of the year. lf therequired yield is 15%, what is the duration of the loan interm of years? (Please round your answer to three decimal places.)
An agreement stipulates payments of $5000,$3500 and $6000 in three, six and nine months, respectively from today. what is the highest price on an investor will offer today to purchase the agreement if he requires a minimum rate of return of 3.75%?
(mark-to-market) You enter a long position in a € future contract with the size of €125,000 today. The futures expire in 90 days. The interest rates are iS = 3.9% and i€ = 3.9%. The current spot rate is $1.38/€. Assume 360 days a year. If the spot rate is $1.43/€ the next day and interest rates remain the same, your profit or loss for this day is S _. (Keep the sign and two decimal places.)
Suppose you have a 2.5-year remaining on an interest rate swap with a notionalprincipal of $10, 000, 000 between Company A and Company B. Company A pays fixed rateand Company B pays the float rate. Fixed and float payments are exchanged every year andthe last payment was exchanged 6 months ago. The fixed rate is 3.5% per annum, and thefloating rate is tied to the annual LIBOR. The previous 1-year LIBOR rate, set 6 months ago,is 2.75%, 6 month LIBOR is 3.25%. the 1.5-year LIBOR is 3.25%, and the 2.5-year LIBOR is3.50%.Calculate the present value of the fixed and floating legs of the swap, and determine the swap’snet present value from Company A’s perspective. Assume annual compounding for discounting.
(mark-to-market) You enter a long position in a € future contract with the size of €125,000 today. The futures expire in 90 days. The interest rates are i$=2.6% and iç-5.5%. The current spot rate is $1.38/€. Assume 360 days a year. If the spot rate is $1.36/€ the next day and interest rates remain the same, your profit or loss for this day is $_ ____.(Keep the sign and two decimal places.)
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?
Ford has a 5 year $100m fixed rate loan with Citibank at 0.061 (annual rate). Ford now thinks rates will go lower and calls Goldman Sachs for a swap and receives a quote of 0.029 / 0.030 (annual rate) against 6m LIBOR flat and executes the swap. Assume at the next rate reset, 6m LIBOR is 0.018 (annual rate). What is Ford's net effective annual interest rate for that rate reset in decimal terms to three decimal places? (eg 5.10% = 0.051)
Consider that the probability of a reference entity defaulting during a year conditional on no earlier defaults to be 2%; assume that defaults always happen halfway through a year; payments made on a CDS are made once a year, at the end of the year; assume the risk-free rate is 5% with continuous compounding and the recovery rate is 40%. We will value a new credit default swap. We are buying protection on an entity. CDS is 3-years. What is the required spread for a new issue? A. 103.63bps B. 98.32bps C. 132.53bps D. 124.49bps
To find the quoted price of a 180-day T - bill with a 5% yield and the contract price for a $ 1,000,000 90 - day notional Eurodollar contract, we need to do a couple of calculations.
Use the following table of spot rates: Years to Maturity Annual Effective Spot Rate 3.00% 2 3.60% 3. 3.85% 4 4.05% 5. 4.20% For a 2-year-deferred, 3-year interest rate swap with the level notional amount is I million and 1-year spot rate at time 3 is 3%, what is the amount of the net settlement payment at time 4? Is this amount paid by the payer, or by the receiver? O a. 15,950 paid by the receiver Ob. 16,950 pay by the receiver O. 15,950 paid by the payer Od. 16,950 paid by the payer O e. None of the above
5. Suppose you buy a one-year forward contract at $65. At expiration, the spot price is $73. The risk-free rate is 10 percent. What is the value of the contract at expiration? a. impossible to tell b. $8.00 c. $7.27 d. –$8.00 e. $0.00

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