Onyx Corporation has a S200, 000 loan that will mature in one year. Therisk free interest rate is 6 percent. The standard deviation in the rate ofchange in the underlying asset's value is 12 percent, and the leverageratio for Onyx is 0.8 (80 percent) . The value for N(hl) is 0.02743, andthe value for N(h2) is 0.96406. What is the current market value of theloan?

Onyx Corporation has a S200, 000 loan that will mature in one year. Therisk free interest rate is 6 percent. The standard deviation in the rate ofchange in the underlying asset's value is 12 percent, and the leverageratio for Onyx is 0.8 (80 percent) . The value for N(hl) is 0.02743, andthe value for N(h2) is 0.96406. What is the current market value of theloan?

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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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
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%
5. Suppose you have a 2.5-year remaining on an interest rate swap with a notional principal of $10,000, 000 between Company A and Company B. Company A pays fixed rate and Company B pays the float rate. Fixed and float payments are exchanged every year and the last payment was exchanged 6 months ago. The fixed rate is 3.5% per annum, and the floating 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 is 3.50%. Calculate the present value of the fixed and floating legs of the swap, and determine the swap's net present value from Company A's perspective. Assume annual compounding for discounting.
4. Suppose that the market rate of interest is 12 per cent on a government bond with a perpetuity payment, which is a coupon value (annual payment) of £6 per year indefinitely. The face value of the loan is £100. a) Define and calculate the price of the bond? Answers.. b) At what yield (or rate) will the loan be trading at par? Explain whether it is trading above or below par in a). Answers... c) Assume that the rate of interest is 'expected' to drop to 3 per cent, derive and calculate the rate of capital gain (or loss)? Answers . d) Derive and explain the expression for the number of bonds held representing the amount of money spent on bonds (B) with the corresponding mean rate of return (HR). Answers.. e) Imagine that W = £40,000, what is the amount spend on bonds, B', if the standard deviation (SD) of earnings (s) is equal to 0.10 with a 3,000,the SD of the total return on bonds, SR. What is the money holding, which is M*? Answers.. Find the mean return on bonds with u = 1. Answer..
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.
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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You work at the NJ Treasury, you raise capital for government projects by issuing variable rate muni - bonds for 2 years maturity. You also know that you can offset your variable muni - bond risk by entering into an interest rate swap with Barclays. You enter into the following swap: You currently agree to pay LIBOR + 1% on the muni bond as coupon. In your swap you agree to pay 4.5% fixed and receive floating LIBOR + 2% Which of the following is true? Group of answer choices if LIBOR was fixed low, you received artificially high rates in the swap. if LIBOR was fixed high, Barclays would make artificially low payments in the swap. if LIBOR was fixed lower than 4.5%, you may have made unnecessary payments to Barclays. if LIBOR was fixed higher than 5%, Barclays would receive higher payments from you
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
15. The table below presents the costs of borrowing for Caterpillar and Tesla, and the a Swap Bank quote against LIBOR. Caterpillar would like to get a $5,000,000.00 floating rate loan. Tesla would like to get a $5,000,000.00 fixed rate loan. How much can Tesla save each year by entering a swap agreement? (a) $37,000 (b) $9,500 (c) $8,000 (d) $27,500 Fixed-Rate Borrowing Cost Floating-Rate Borrowing Cost Caterpillar Tesla 3.00 6.50 LIBOR LIBOR +2.60 Swap Bank Quote Bid Ask 3.19% 3.74% (e) None of the above

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