a Black plc has a 50m ten-year floating-rate loan from Bank A at Libor + 150...

 

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a Black plc has a £50m ten-year floating-rate loan from Bank A at Libor + 150 basis points. The treasurer is worried that interest rates will rise to a level that will put the firm in a dan- gerous position. White ple is willing to swap its fixed-interest commitment for the next ten years. White currently pays 9 per cent to Bank B. Libor is currently 8 per cent. Show the interest-rate payment flows in a diagram under a swap arrangement in which each firm pays the other's interest payments. b What are the drawbacks of this swap arrangement for Black? c Black can buy a ten-year interest-rate cap set at a Libor of 8.5 per cent. This will cost 4 per cent of the amount covered. Show the payment flows if in the fourth year Libor rises to 10 per cent. d Describe a 'floor' and show how it can be used to alleviate the cost of a cap. a Black plc has a £50m ten-year floating-rate loan from Bank A at Libor + 150 basis points. The treasurer is worried that interest rates will rise to a level that will put the firm in a dan- gerous position. White ple is willing to swap its fixed-interest commitment for the next ten years. White currently pays 9 per cent to Bank B. Libor is currently 8 per cent. Show the interest-rate payment flows in a diagram under a swap arrangement in which each firm pays the other's interest payments. b What are the drawbacks of this swap arrangement for Black? c Black can buy a ten-year interest-rate cap set at a Libor of 8.5 per cent. This will cost 4 per cent of the amount covered. Show the payment flows if in the fourth year Libor rises to 10 per cent. d Describe a 'floor' and show how it can be used to alleviate the cost of a cap.

Answer rating: 100% (QA)

d A floor sets a base level of interest that a borrower m... View the full answer