US, Inc. has just borrowed $1 million. The loan requires annual interest payments of 3% with...

 

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US, Inc. has just borrowed $1 million. The loan requires annual interest payments of 3% with the princi- pal repaid after the third year. The firm also entered a currency swap with BigDealer where US, Inc. pays 3% interest on ¥100 million and receives 3% interest on $1 million. The swap payments occur after each of the next three years and the principal is exchanged at both the beginning and the end of the swap. (a) After totaling the effects of the loan and the swap, what are the net cash flows for US, Inc. over each of the next three years? Today End Year 1 End Year 2 End Year 3 (b) What is US, Inc. trying to accomplish by using this loan/swap transaction? (c) Is the default risk faced by US, Inc.'s counterparty in the swap any different than the default risk it would face if it simply loaned US, Inc. ¥100 million at 3% interest? Explain. US, Inc. has just borrowed $1 million. The loan requires annual interest payments of 3% with the princi- pal repaid after the third year. The firm also entered a currency swap with BigDealer where US, Inc. pays 3% interest on ¥100 million and receives 3% interest on $1 million. The swap payments occur after each of the next three years and the principal is exchanged at both the beginning and the end of the swap. (a) After totaling the effects of the loan and the swap, what are the net cash flows for US, Inc. over each of the next three years? Today End Year 1 End Year 2 End Year 3 (b) What is US, Inc. trying to accomplish by using this loan/swap transaction? (c) Is the default risk faced by US, Inc.'s counterparty in the swap any different than the default risk it would face if it simply loaned US, Inc. ¥100 million at 3% interest? Explain.

Answer rating: 100% (QA)

Solution a The net cash flows for US Inc over each of the next three years can be calculated as follows Year 1 Interest payment on loan 390000 Interes... View the full answer