You currently make loan payments at a rate of 2.9% above LIBOR. A plain vanilla interest rate swap is available whereby one party will pay LIBOR and the other will pay 3.5%. LIBOR is currently 3.4%. You want to hedge your interest rate risk by effectively turning your variable- rate payments into fixed-rate payments. First, figure out how you would do this. After you've put the hedge in place, what net fixed interest rate are you now paying? Go out three decimal places. The answer should be 0.064. How do you get that?
You currently make loan payments at a rate of 2.9% above LIBOR. A plain vanilla interest rate swap is available whereby one party will pay LIBOR and the other will pay 3.5%. LIBOR is currently 3.4%. You want to hedge your interest rate risk by effectively turning your variable- rate payments into fixed-rate payments. First, figure out how you would do this. After you've put the hedge in place, what net fixed interest rate are you now paying? Go out three decimal places. The answer should be 0.064. How do you get that?
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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Transcribed Image Text:You currently make loan
payments at a rate of 2.9% above
LIBOR. A plain vanilla interest rate
swap is available whereby one
party will pay LIBOR and the
other will pay 3.5%. LIBOR is
currently 3.4%. You want to hedge
your interest rate risk by
effectively turning your variable-
rate payments into fixed-rate
payments. First, figure out how
you would do this. After you've
put the hedge in place, what net
fixed interest rate are you now
paying? Go out three decimal
places. The answer should be
0.064. How do you get that?
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