Chapter 8

Reference Rates. What is an interest reference rate and how is it used to set rates for individual borrowers?

Credit Risk Premium. What is a credit risk premium?

6. Investment Grade versus Speculative Grade. What do the general categories of investment grade and speculative grade represent?

14. LIBOR Flat. Why do fixed-for-floating interest rate swaps never swap the credit spread component on a

floating-rate loan?

1. U.S. Treasury Bill Auction RatesMarch 2009. The interest yields on U.S. Treasury securities in early 2009 fell to very low levels as a result of the combined events surrounding the global financial crisis. Calculate the simple and annualized yields for the 3-month and 6-month Treasury bills auctioned on March 9, 2009, listed here.

3-Month T-Bill 6-Month T-Bill

Treasury bill,

face value $10,000.00 $10,000.00

Price at sale $9,993.93 $9,976.74

Discount $6.07 $23.26

9. Delos Debt Renegotiations (A). Delos borrowed 80 million two years ago. The loan agreement, an amortizing loan, was for six years at 8.625% interest per annum. Delos has successfully completed two years of debt-service, but now wishes to renegotiate the terms of the loan with the lender to reduce its annual payments.

a. What were Deloss annual principal and interest payments under the original loan agreement?

b. After two years debt service, how much of the principal is still outstanding?

c. If the loan were restructured to extend another two years, what would the annual paymentsprincipal and interestbe? Is this a significant reduction from the original agreements annual payments?

16. Falcor. Falcor is the U.S.-based automotive parts supplier that was spun-off from General Motors in 2000. With annual sales of over $26 billion, the company has expanded its markets far beyond traditional automobile manufacturers in the pursuit of a more diversified sales base. As part of the general diversification effort, the company wishes to diversify the currency of denomination of its debt portfolio as well. Assume Falcor enters into a $50 million 7-year cross-currency interest rate swap to do just thatpay euros and receive dollars. Using the data in Exhibit 8.12, solve the following:

a. Calculate all principal and interest payments in both currencies for the life of the swap.

b. Assume that three years later Falcor decides to unwind the swap agreement. If 4-year fixed rates of interest in euros have now risen to 5.35%, 4-year fixed rate dollars have fallen to 4.40%, and the current spot exchange rate is $1.02/, what is the net present value of the swap agreement? Explain the payment obligations of the two parties precisely.