FirstTier is a large UK-based multinational business with a very strong credit rating. It is currently...
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FirstTier is a large UK-based multinational business with a very strong credit rating. It is currently looking to raise 100m of new finance which, given that its income stream varies with interest rates, it would prefer to raise as floating rate finance. FirstTier has been offered rates of 6% fixed or a floating rate of LIBOR + 0.2% Second Tier, a small but rapidly expanding UK business, is also looking to raise 40m but is seeking fixed rate finance. Second Tier has been offered a floating rate of LIBOR + 1.2 % or a fixed rate of 7.6%. MiddleBank has suggested a swap arrangement to both parties with MiddleBank acting as intermediary and taking a fee of 0.1% from each of the parties. Required: Demonstrate that a swap arrangement could be beneficial. (5 marks) Calculate the net borrowing costs for each counterparty and the swap structure and cash flows if any benefit is to be split equally between FirstTier and Second Tier. In explaining the swap structure, briefly explain the principle of comparative advantage. (10 marks) What are the advantages and risks of an interest rate swap and why may the counterparties use the intermediary and pay them 0.1% each? (5 marks) FirstTier is a large UK-based multinational business with a very strong credit rating. It is currently looking to raise 100m of new finance which, given that its income stream varies with interest rates, it would prefer to raise as floating rate finance. FirstTier has been offered rates of 6% fixed or a floating rate of LIBOR + 0.2% Second Tier, a small but rapidly expanding UK business, is also looking to raise 40m but is seeking fixed rate finance. Second Tier has been offered a floating rate of LIBOR + 1.2 % or a fixed rate of 7.6%. MiddleBank has suggested a swap arrangement to both parties with MiddleBank acting as intermediary and taking a fee of 0.1% from each of the parties. Required: Demonstrate that a swap arrangement could be beneficial. (5 marks) Calculate the net borrowing costs for each counterparty and the swap structure and cash flows if any benefit is to be split equally between FirstTier and Second Tier. In explaining the swap structure, briefly explain the principle of comparative advantage. (10 marks) What are the advantages and risks of an interest rate swap and why may the counterparties use the intermediary and pay them 0.1% each? (5 marks)
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The image shows a text that presents a scenario involving three parties FirstTier SecondTier and MiddleBank It describes their preferences for raising finance and provides information about the intere... View the full answer
Related Book For
Foundations of Financial Management
ISBN: 978-1259024979
10th Canadian edition
Authors: Stanley Block, Geoffrey Hirt, Bartley Danielsen, Doug Short, Michael Perretta
Posted Date:
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