ent time one can enter five-year swaps that exchange LIBOR for 8%. An off-market swap would be defined as a swap of LIBOR for a rate other than 8%. For example, a firm with a 10% 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 10%. What up-front payment will be required to induce a counterparty to take the other side of the swap? Assume a notional principal of $10million. Use 8% as discount rate for all

ent time one can enter five-year swaps that exchange LIBOR for 8%. An off-market swap would be defined as a swap of LIBOR for a rate other than 8%. For example, a firm with a 10% 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 10%. What up-front payment will be required to induce a counterparty to take the other side of the swap? Assume a notional principal of $10million. Use 8% as discount rate for all

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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You are thinking about entering into a 3 year plain vanilla swap with annual payments and a notional principal of $5,000,000. If you plan to pay the fixed rate on the swap what would you expect to pay if annual interest rates are listed below per annum with continuous compounding? Year Rate 1 3.00% 2 3.50% 3 4.50% A) $53,221.46 B) $150,000.00 C) $183,333.33 D) $227,411.44 E) $372,407.89 The answer is D. Show all work to reach D, no Excel.
a) Suppose you see Citibank’s USD-denominated 5-year interest rate swap numbers quoted at 4.25% bid and 4.45% ask. Mary tells you that the relevant fixed-rate cash flow of the swap she just entered is 4.25%. Did Mary buy or sell the IRS she just entered? b) IF Mary (from a) is a speculator, is Mary betting on/forecasting a decline in interest rates or betting on/forecasting a rise in interest rates?
An off-market forward contract is a forward where either you have to pay a premium or you receive a premium for entering into the contract. (With a standard forward contract, the premium is zero.) Suppose the effective annual interest rate is 11 % and the S-R index is 1000. Consider 1-year forward contracts. a) Suppose you are offered a long forward contract at a forward price of $ 1310. How much would you need to be paid to enter into this contract $ 144.1 ? b) Suppose you are offered a long forward contract at a forward price of $ 1035. How much would you need be willing to pay to enter into this contract $ 113.85 ?
The company HelloCustomer is afraid of another Corona lockdown and wants to safeguard some liquidity. Therefore it issues a bond with a face value of EUR 100 million at a price of 97.9 and a maturity of 9 years. The coupon payment is USD 1 million each year and the payment annually. The current exchange rate is 1 EUR = 1.22 USD. After 9 years the company promises to pay back the full notional amount. In addition the bond has a call option after 3 years. What is the yield to call? Please also explain how you calculated it.
You are an exporter in possession of Banker’s Acceptance (B/A). You are considering holding the B/A until maturity or selling it in the Money Market (MM). If the face amount of the B/A is 10,000,000 USD, the acceptance commission is 2%, and the competitive MM rate for 90-day B/As is 5% What bond equivalent yield would make you indifferent between the MM and holding the B/A until maturity? Note: for B/A calculations you can assume a banker’s year (360 days), for bond calculations the convention is to use the actual number of days (365). Show and explain any intermediary calculations. Also interpret and explain your conclusion. I want the interpretation please.
The yield on a one-year Treasury security is 4.6900%, and the two-year Treasury security has a 6.3315% yield. Assuming that the pure expectations theory is correct, what is the market's estimate of the one-year Treasury rate one year from now? (Note: Do not round your intermediate calculations.) 6.799% O7.9988% O9.1186% O 10.1585% Recall that on a one-year Treasury security the yield is 4.6900% and 6.3315% on a two-year Treasury security. Suppose the one-year security does not have a maturity risk premium, but the two-year security does and it is 0.15%. What is the market's estimate of the one-year Treasury rate one year from now? (Note: Do not round your intermediate calculations.) O 7.6942% O 8.7714% O9.7716% O 6.5401% Suppose the yield on a two-year Treasury security is 5.83%, and the yield on a five-year Treasury security is 6.20%. Assuming that the pure expectations theory is correct, what is the market's estimate of the three-year Treasury rate two years from now? (Note: Do not…
ABC Co. has a large amount of variable rate financing due in one year. The management is concerned about the possibility of increases in short-term rates. Which would be an effective way of hedging this risk?a. Buy Treasury notes in the futures market.b. Sell Treasury notes in the futures market.c. Buy an option to purchase Treasury bonds.d. Sell an option to purchase Treasury bonds
A futures contract will mature in one time step. The current return over one time-step is R = 1.01 and the underlying asset of the future contract is currently worth $27 and has up factor u = 1.1 and down factor d = 0.9. The margin account for the short side of this futures contract currently holds $16. How much will the margin account hold when the futures contract matures if the underlying asset increases in value?
Suppose that the current rates on 60 and 120 day GICs are 5.50% and 5.75%, respectively. An investor is weighing the alternatives of purchasing a 120 day GIC versus purchasing a 60 day GIC and then reinvesting its maturity value in a second 60 day GIC.What would the interest rate on 60 day GICs have to be 60 days from now for the investor to end up in the same financial position with either alternative?
A firm can issue one of the listed products and convert them into the floating rate using IR swaps (LIBOR for 3.7% fixed). What is the lowest floating rate that the firm can get? Fixed rate note: 4% Simple FRN: L + 0.5% Inverse floater: 7.6% - L (e.g., if we can pay only L + 0.1% that would be great, but can we obtain such a low rate?) a.) L + 0.1% b.) L + 0.2% c.) L + 0.3% d.) L + 0.5%
Consider a CDS on Lehman Brothers default event. Given today’s market conditions you know that the present value of expected premium payments 6.0250*s, the present value of expected accrual payments is 0.0515*s and the present value of expected payoff is 0.1325. All measured per $1 of notional principal. You also know that Argo hedge fund bought this CDS on Lehman Brothers default from AIG one week ago with contractual rate of X basis points per year. Given this information the breakeven spread (i.e. the value of s) is _________ and today’s value of the CDS contract to AIG is positive if the value of s is _______ than X. a. 222 basis points;greater b. 218 basis points; smaller c. 218 basis points, greater d. 222 basis points; smaller e. 84 basis points; greater Please help and explain
4. An American put option to sell a British pound for dollars has a strike price of $1.5 and a time to maturity of 1 year. The volatility of the pound/dollor exchange rate is 15% per annum, the dollar interest rate is 6%, the British pound interest rate is 7%, per annum, and the current exchange rate is 1.52. Use a three-step binomial tree to value the option.