Consider the borrowing rates for Parties A and B. A wants to finance a $100,000,000 project at an annual fixed rate. B wants to finance a $100,000,000 project at an annual floating rate. Both firms want the same maturity of five years. Firm Fixed Rate Floating Rate A $10.3% Prime+1% B $8.9% Prime+0.5% a.Is there any swap opportunity? Why? b. A swap bank quote an annual fixed rate of 8.7%-9.0% against the annual floating rate of Prime+1%. Please draw the diagram to illustrate the swap. C. What are the savings or gains (in %) for firm A, firm B, and the swap bank, respectively? d. Assume that one-year later, the swap bank is quoting four-year dollar swaps at 7.00-7.30 percent versus Prime+1%. What is the value of the swap in one-year? If the firm B wants to exist the swap agreement, what should firm B do
Consider the borrowing rates for Parties A and B. A wants to finance a $100,000,000 project at an annual fixed rate. B wants to finance a $100,000,000 project at an annual floating rate. Both firms want the same maturity of five years. Firm Fixed Rate Floating Rate A $10.3% Prime+1% B $8.9% Prime+0.5% a.Is there any swap opportunity? Why? b. A swap bank quote an annual fixed rate of 8.7%-9.0% against the annual floating rate of Prime+1%. Please draw the diagram to illustrate the swap. C. What are the savings or gains (in %) for firm A, firm B, and the swap bank, respectively? d. Assume that one-year later, the swap bank is quoting four-year dollar swaps at 7.00-7.30 percent versus Prime+1%. What is the value of the swap in one-year? If the firm B wants to exist the swap agreement, what should firm B do
Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
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Transcribed Image Text:Consider the borrowing rates for Parties A and B. A wants to
finance a $100,000,000 project at an annual fixed rate. B wants to
finance a $100,000,000 project at an annual floating rate.
Both firms want the same maturity of five years.
Firm
Fixed Rate
Floating Rate
A
$10.3%
Prime+1%
B
$8.9%
Prime+0.5%
a.Is there any swap opportunity? Why?
b. A swap bank quote an annual fixed rate of 8.7%-9.0% against the
annual floating rate of Prime+1%. Please draw the diagram to
illustrate the swap.
C.
What are the savings or gains (in %) for firm A, firm B, and the swap
bank, respectively?
d. Assume that one-year later, the swap bank is quoting four-year
dollar swaps at 7.00-7.30 percent versus Prime+1%. What is the
value of the swap in one-year? If the firm B wants to exist the swap
agreement, what should firm B do
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