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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![Problem 2 [5]
The following spot rates are observed in the market
t (years) is (%)
1
6.50
2
6.68
6.84
4
6.95
7.12
> 6
7.50
ABC Ltd. borrows $100 millions at floating interest rates for 10 years. Level interest-
only repayments are made annually at the end of the year. To reduce their interest
rate risk ABC Ltd. wants to enters a interest rate swap as a fixed-rate payer.
a) Calculate the swap rate based on the current information.](/v2/_next/image?url=https%3A%2F%2Fcontent.bartleby.com%2Fqna-images%2Fquestion%2F6cf6ddae-9ac7-47df-aae2-c8ccea72b238%2Fdc5e8a9c-528e-43d4-a53f-fbb02cdd9143%2Fb5wuhm_processed.png&w=3840&q=75)
Transcribed Image Text:Problem 2 [5]
The following spot rates are observed in the market
t (years) is (%)
1
6.50
2
6.68
6.84
4
6.95
7.12
> 6
7.50
ABC Ltd. borrows $100 millions at floating interest rates for 10 years. Level interest-
only repayments are made annually at the end of the year. To reduce their interest
rate risk ABC Ltd. wants to enters a interest rate swap as a fixed-rate payer.
a) Calculate the swap rate based on the current information.
Transcribed Image Text:b) The actual interest rates of the first 5 years are given by
6.50%, 6.65%, 6.85%, 6.98%, &7.05%.
Determine the cashflows for ABC Ltd. regarding to the interest rate swap for the
first 5 years. Calculate the present value of the profit/loss for ABC Ltd. using
the actual interest rates.
c) At the beginning of year 5, the following spot rates are observed
t (years) | is (%)
1
7.25
2
7.45
7.58
4
7.65
7.70
Determine the market value of ABC Ltd.'s position regarding the interest rate
swap.
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