6. Today is t = 0 = March 1, 2001. Firm XYZ sold a piece of...

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6. Today is t = 0 = March 1, 2001. Firm XYZ sold a piece of equipment to a highly rated corporation, and it is then due to receive payments in 10 equal installments of $3 million each over the next 5 years. The firm would like to use these $3 million semi-annual cash flows to hedge against the coupon payments the firm must make to service a $100 million floating rate bond that it issued in the past and expiring in 5 years. Suppose that the floating rate on the corporate bond is tied to the LIBOR and coupon rate is flat LIBOR. The current level of LIBOR is 5.6%. the LIBOR were to increase substantially, the cash flows from the installments may not be sufficient to service the debt. Hence, the firm decides to enter into a swap contract with an investment bank, in which the firm pays the fixed semi-annual swap rate c, over a notional of $100 million, and the bank pays the 6-month LIBOR to the firm. The investment bank quotes a 5-year swap rate of 5.8%. 6. Today is t = 0 = March 1, 2001. Firm XYZ sold a piece of equipment to a highly rated corporation, and it is then due to receive payments in 10 equal installments of $3 million each over the next 5 years. The firm would like to use these $3 million semi-annual cash flows to hedge against the coupon payments the firm must make to service a $100 million floating rate bond that it issued in the past and expiring in 5 years. Suppose that the floating rate on the corporate bond is tied to the LIBOR and coupon rate is flat LIBOR. The current level of LIBOR is 5.6%. the LIBOR were to increase substantially, the cash flows from the installments may not be sufficient to service the debt. Hence, the firm decides to enter into a swap contract with an investment bank, in which the firm pays the fixed semi-annual swap rate c, over a notional of $100 million, and the bank pays the 6-month LIBOR to the firm. The investment bank quotes a 5-year swap rate of 5.8%.