Mackenzie Alberta is the CFO for Redwater Corporation, a multinational manufacturing company based in Canada. Eighteen months ago, Redwater issued fixed-rate coupon bonds in Canada. Alberta now expects Canadian interest rates to fall and remain low for four years. During this four-year period, Alberta wants to use a par interest rate swap to effectively convert the fixed-rate bond coupon payments into floating-rate payments. Part (a): Explain how to construct the swap that Alberta wants to use with regard to the swap: (5 Marks) Part (b): A US bond portfolio manager wants to hedge a long position in a 12-year Treasury bond against a potential rise in domestic interest rates. He would most likely: A. sell fixed income (bond) futures. B. enter a receive-fixed 12-year interest rate swap. C. sell a strip of 120-day Eurodollar futures contracts. Explain? (5 Marks) Part (c): The real risk-free rate is 3.0%. Inflation is predicted to be 3.1% this year, 4.0% next year, and 3.6% for the following years. The maturity risk premium is determined by 0.0008(t-1), where t signifies the number of years until maturity. Can you calculate the nominal interest rate for a 8-year government bond? (Hint: Compute the average of the forecasted

Answer rating: 100% (QA)

Part a To construct the swap Alberta would enter into a par interest rate swap where Redwater would pay a fixedrate coupon to a counterparty and recei... View the full answer