1. Titan Manufacturing entered into a four-year swap agreement which would provide floating-rate payments for fixed -rate payments. Over the next four years, interest rates declined. Based on these conditions, did Titan Manufacturing benefit from the swap? Explain your answer.

2. Titan Electric negotiates a forward swap to begin three years from now, in which it will swap floating-rate payments for fixed-rate payments. What will be the effect on Titan Electric if interest rates fall substantially over the next three years? For example, is Titan Electric better off using the forward swap or should they have simply waited three years before negotiating the swap? Explain your answer.

3. Titan Laundry receives interest from its floating-rate loan portfolio and pays interest on its long-term bonds. Titan Laundry is concerned interest rates will decline in the future. Yet, Titan does not want to hedge its interest rate risk because it believes interest rates may

increase. Recommend a swap strategy which would solve Titan Laundry's dilemma. Explain your answer.

4. Packer Credit Union enters into a four-year interest rate collar with the one-year LIBOR as the interest rate index. For $5 million, Packer Credit Union buys an interest rate cap with $250 million of notional principal and an 8 percent interest rate ceiling. For $6.5 million, Packer Credit Union sells an interest rate floor with $250 million of notional principal and a 6 percent interest rate floor. Assume that one-year LIBOR is expected to be 5 percent, 7 percent, 8 percent, and 10 percent, respectively, for the next four years. Answer the following questions and explain your answers:

a. At time zero, what is the net fees paid by Packer to enter the interest rate collar?

b. At the end of year 1, what is the expected net payment for Packer?

c. At the end of year 2, what is the expected net payment for Packer?

d. At the end of year 3, what is the expected net payment for Packer?

e. At the end of year 4, what is the expected net payment for Packer?

f. Over the entire life of the interest rate collar, what is the expected net payment for Packer?

Answer rating: 100% (QA)

Titan Manufacturing and Interest Rate Swaps 1 Benefit from the Swap No Titan Manufacturing did not b... View the full answer