Question: a) Consider two corporations A and B. A, a high-quality borrower, wishes to raise $50 million in five-year floating rate funding. The company can borrow

a) Consider two corporations A and B. A, a high-quality borrower, wishes to raise $50 million in five-year floating rate funding. The company can borrow fixed rate at 5% and floating rate at Libor-0.5%. B, a lower rated company, wishes to raise $50 million in five-year fixed rate funding. B finds it can borrow fixed at 7% and floating at Libor+0.5%. Design a swap contract that will benefit both A and B, clearly specifying the rates.

b) A firm wishes to enter into an interest rate swap with a bank, for a period of 3 years, with LIBOR as the floating rate, reset every six months. The bank gives the following quote: Maturity (yrs) Bid Offer 3 6.03 6.06 The reason for the firm to enter into this swap is, it wants to convert some of its investments that are earning LIBOR minus 0.5% to fixed rate investments. Explain how the firm can achieve this, using the quote given above.

Step by Step Solution

There are 3 Steps involved in it

1 Expert Approved Answer

Step: 1 Unlock

Swap Design for Both Companies a Swap Structure Type FixedforFloating Swap Counterparties A pays fix... View full answer

Question Has Been Solved by an Expert!

Get step-by-step solutions from verified subject matter experts

Step: 2 Unlock

Step: 3 Unlock

Students Have Also Explored These Related Finance Questions!

An issue of bonds with par of $1000 matures in 12 years and pays interest at 7% annually. The current quoted market price is $1200 and the investors required rate of return is 8%. (a) Calculate the...

The investment banker helping Hologen with the Cybertech acquisition had done some preliminary research and concluded that Hologen could raise $200 million dollars by issuing a 5% coupon bond (paid...

Mrs. B, recently widowed and in her mid to late 40s, is a senior executive working for a Singapore-based multi-national corporation with SGD 10 billion in global sales. She has a son aged 20 and a...

2. Consider two corporations A and B. A, a high-quality borrower, wishes to raise $50 million in five-year floating rate funding. The company can borrow fixed rate at 5% and floating rate at...

2. a) Consider two corporations A and B. A, a high-quality borrower, wishes to raise $50 million in five-year floating rate funding. The company can borrow fixed rate at 5% and floating rate at...

Consider two corporations A and B. A, a high-quality borrower, wishes to raise $50 million in five-year floating rate funding. The company can borrow fixed rate at 5% and floating rate at Libor0.5%....

Only do the Product Financing case First analyze / discuss at least 3 issues and then give your conclusion to either include this financing arrangement as part of your liability risk analysis or...

Companies A and B have been offered the following rates per annum on a $20 million five-year loan: Company A Company B Fixed rate 12.0% 13.4% Floating rate LIBOR + 0.1% LIBOR + 0.6% Company A...

good morning, i will be glad if you can help me with these final exam review questions. regards 1 - Dutch Auction': Palantir, a privately held company, is contemplating going public either through...

In Python 3.x use regex to compile a list of names and email addresses from the csv file customerData.csv, based on the following information: Gender = Male State = Washington Transactions in last 3...

You received the following message via email from your supervisor. After reviewing the message, identify one change from the list below that you would make and thoroughly explain why you would make...

Evaluate 2 1 5 1 ( 9 x 2 ) 3 / 2 dx .

Preparing a Multiple-Step Income Statement The following data were taken from the records of Township Corporation at December 31, 2012: Sales revenue $79,000 Gross profit 28,000 Selling...

Analyzing and Interpreting Return on Assets Tiffany & Co. is one of the worlds premier jewelers and a designer of other fine gifts and housewares. Presented here are selected income statement and...

To assess the efficacy of different liquids for cooling an object of given size and shape by forced convection it is convenient to introduce figure of merit, FF, which combines the influence of an...

An NH3 H2O mixture containing 60 wt% NH3 is brought to equilibrium in a closed container at 140F. The total mass of the mixture is 250 g. Use Figure 8.5-2 to determine the masses of ammonia and of...

You have analyzed an aqueous ammonia solution and find that it contains 30 wt% NH3. (a) Use Figure 8.5-2 to determine the mass fraction of NH3 in the vapor that would be in equilibrium with this...

anwer 4 and 5 are incorrect. the investee owns an unrecorded (internally developed) patent with a fair value equal to $455,000 The patent has a remaining useful life of 10 years. what is the...

In what sense could one argue that if managers make decisions using breakeven analysis, they are not maximizing shareholder wealth? How can breakeven analysis be modified to solve this problem?

What is meant by an agency cost or agency problem? Do these interfere with maximizing shareholder wealth? Why or why not? What mechanisms minimize these costs/problems? Are executive compensation...

What is a debenture? Why do you think that this is the most common form of corporate bond in the United States, but is much less commonly used elsewhere?

As an example of how the sampling distribution for the MannWhitney Test is derived, consider two samples with sample sizes n1 2 and n2 3. The distribution is obtained under the assumption that the...

Suppose as part of your job you are responsible for installing emergency lighting in a series of state office buildings. Bids have been received from four manufacturers of battery-operated emergency...

Referring to Exercise 17-41, suppose that there were 40 ties at eight different salary levels. The following shows how many scores were ties at each salary level: a. Given the results in the previous...