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?

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?

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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nsurance company, IHI, is part of a swap agreement with investment bank Lachlin Bank on a notional principal of $100 million. IHI has agreed to pay Lachlin Bank the six month BBSW rate and receives 7% pa, convertible half-yearly. If the swap has a residual life of 18 months, and the next interest payment is due in six months, calculate the value of the swap for Lachlin, given BBSW rates (compounding continuously) for the corresponding 6, 12 and 18 month maturities are 6.91% pa, 7.3% pa, 7.35% pa and the half year BBSW rate on the next payment is known to be 7% pa compounding half-yearly. Give your answer in millions of dollars to 2 decimal places. Value = $ ___________ million ANSWER IN TYPING OTHER WISE DOWNVOTE YOU
(b) Calculate the effective interest rate paid by Vri.com and Yadine in the following swap. Vri.com: Borrower rated AA that can borrow for three years at either 5% fixed or LIBOR plus 50 basis points. Borrower rate BBB that can borrow for three years at either 8% fixed or Yadine: LIBOR plus 150 basis points. 5%+1% Vri.com Yadine LIBOR +50 5% fixed LIBOR +
Your bank is offering you an account that will pay 19% interest (an effective two-year rate) in total for a two-year deposit. Determine the equivalent discount rate for the following periods: a. Six months b. One year c. One month (Note: Be careful not to round any intermediate steps less than six decimal places.) a. Six months The equivalent discount rate for a period length of six months is %. (Round to two decimal places.)
Some time ago a swap dealer entered into a Forward Rate Agreement (FRA) that has a notional value of $25,000,000. The swap dealer agreed to pay 4.96% based on quarterly compounding and receive Libor. Libor zero rates (based on continuous compounding are given below. a. What is the value of the FRA to the swap dealer assuming it begins in 9 months and lasts for 3 months? + b. Provide an example which shows exactly how the swap dealer can hedge its position in the FRA. Maturity (months) Zero Rate (%) 4 6 4.54 5 5.5 12 15
An interest rate swap has three years of remaining life. Payments are exchanged annually. Interest at 5% is paid and 12-month LIBOR is received. An exchange of payments has just taken place. The one-year, two-year and three-year LIBOR/swap zero rates are 4%, 5% and 6%. All rates are annually compounded. What is the value of the swap as a percentage of the principal ($100) when OIS and LIBOR rates are the same? (
Consider a $15 million interest-rate swap in which cash flows based on a fixed rate of 5% (with semi-annual compounding) are exchanged for 6-month LIBOR. The swap has a remaining life of 9 months. The 6-month LIBOR that was observed three months ago was 4.85% (with semi-annual compounding). The forward LIBOR for the period between 3 months and 9 months (from today) is 6.14% (with semi-annual compounding). The risk-free rates for 3 months and 9 months are 5.3% and 5.8%, respectively, with continuous compounding. Calculate the value of the swap to the party receiving the fixed rate.
You signed a 15-year interest swap with annual payments to pay fixed and receive floating. The quote was 4.5-4.7% against LIBOR flat. The principal is 100,000. What is the value of the swap 5 years later if the 15-Y LIBOR is 2% and the 10-Y LIBOR is 3%? (please use a fixed rate to discount the cash flows.) Round to the nearest US cent (2 decimal places).
You are considering three alternative investments:
A loan is to be repaid by an annuity payable monthly in arrears over a 5-year period. The annuity starts at a rate of £200 per month and increases each month by £5. Repayments are calculated using a rate of interest of 8% per annum effective. (i) Calculate the amount of the original loan to the nearest £. (ii) (iii) Calculate the capital outstanding at the end of the first year (after the payment due has been made) to the nearest £0.01. Hence, or otherwise, calculate the capital and interest components of the 13th and 14th payments.
8) A bank client has a debt of 12,425 pesos including interest to be paid in 12 months. The debtor receives unexpected sales flows and decides to advance the payment of his debt at this time for 6,649 pesos and negotiates to pay the rest in two years. What is the payment you will have to make to pay off your debt within 48 months? The conditions of the negotiation are: simple annual interest rate of 12.34% and that the focal date of 48 months is considered for resolution. options: 6603.78 7093.78 6595.78 7131.78
Companies A and B want to borrow €10 million each (they want to issue debt) for years. The market offers them the following alternatives (Symbol for floating rate: L). Company A) Floating rate: L + 1.5%, Fix rate: 2.0%. Company B) Floating rate: L+ 3.0%, Fix rate: 5.0%. A financial institution arranges a swap and charges 10 basis points (0.1%) per year. If the swap is organized so that it is equally attractive to both companies: What is the net rate of interest that will end up paying company A and B
Use the following information for questions 12-15: Under the terms of an interest rate swap, a financial institution has agreed to pay 10% per annum and to receive the 3-month LIBOR in return on a notional principal of $50 million with payments exchanged every 3 months. The swap has a remaining life of 14 months. The current rate being swapped for 3- month LIBOR is 11.8% per annum for all maturities. The 3-month LIBOR rate 1 month ago was 12% per annum. All rates are compounded quarterly.

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