XYZ company invests in a ten (10) year maturity, fixed-rate loan that pays eight percent (8%) per
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Question:
XYZ company invests in a ten (10) year maturity, fixed-rate loan that pays eight percent (8%) per annum every 3 months. To finance the investment, it has borrowed in the short-term money market at 3-month LIBOR +1% and must re-borrow in the money market every three months for ten (10) years.
Answer ALL of the following parts to this question:
- Describe what type(s) of financial risk XYZ faces with this funding strategy.
- If the 3-month LIBOR interest rate increases, will XYZ gain or lose on it investment strategy? Explain your answer.
- Assume XYZ enters into an interest rate swap with its bank in which it promises to pay five percent (5%) per annum and receive 3-month LIBOR. Calculate the hedged net profit on the investment and explain whether the interest rate risk has been removed?
Related Book For
Engineering Economic Analysis
ISBN: 9780195168075
9th Edition
Authors: Donald Newnan, Ted Eschanbach, Jerome Lavelle
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