Given the following information: Borrower AAA BBB Fixed rate Floating rate 8.50% p.a. LIBOR 9.20% p.a. LIBOR + 0.50% p.a. The notional principal of the swap agreement is USD 1 million. 1. Explain the concept of notional principal. 2. Under the assumption of no intermediation/no intermediation fees and an equal split of savings (if any), determine whether a profitable interest rate swap could be arranged between AAA Limited and BBB Limited. Explain your reasoning. 3. If a profitable swap is possible, construct a swap that would advantage both parties. Indicate which party should borrow at a fixed rate using a bond issue and which party should borrow at a floating rate via a bank loan.
Given the following information: Borrower AAA BBB Fixed rate Floating rate 8.50% p.a. LIBOR 9.20% p.a. LIBOR + 0.50% p.a. The notional principal of the swap agreement is USD 1 million. 1. Explain the concept of notional principal. 2. Under the assumption of no intermediation/no intermediation fees and an equal split of savings (if any), determine whether a profitable interest rate swap could be arranged between AAA Limited and BBB Limited. Explain your reasoning. 3. If a profitable swap is possible, construct a swap that would advantage both parties. Indicate which party should borrow at a fixed rate using a bond issue and which party should borrow at a floating rate via a bank loan.
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 4P
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