The Acme Insurance Company purchased a five-year bond whose interest rate floats with LIBOR. Specifically, the...
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The Acme Insurance Company purchased a five-year bond whose interest rate floats with LIBOR. Specifically, the interest rate in a given year is equal to LIBOR plus 200 basis points. At the same time that the insurance company purchases this bond, it enters into a floor agreement with J.P. Morgan in which the notional principal amount is $35 million with a strike of 6%. The premium Acme Insurance Company agrees to pay J.P. Morgan each year is $300,000. Suppose at the time that it is necessary to determine whether a payment must be made by J.P Morgan, the LIBOR is 9%. How much must Bear Stearns pay Acme Insurance Company? The Acme Insurance Company purchased a five-year bond whose interest rate floats with LIBOR. Specifically, the interest rate in a given year is equal to LIBOR plus 200 basis points. At the same time that the insurance company purchases this bond, it enters into a floor agreement with J.P. Morgan in which the notional principal amount is $35 million with a strike of 6%. The premium Acme Insurance Company agrees to pay J.P. Morgan each year is $300,000. Suppose at the time that it is necessary to determine whether a payment must be made by J.P Morgan, the LIBOR is 9%. How much must Bear Stearns pay Acme Insurance Company?
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To solve this problem we need to determine whether the interest rate on the bond is below the floor ... View the full answer
Related Book For
Statistics For Business And Economics
ISBN: 9780132745659
8th Edition
Authors: Paul Newbold, William Carlson, Betty Thorne
Posted Date:
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