Asset Swaps and Swap Spreads: Interest Rate Strategy

The flow of funds within financial markets is stimulated by the money, bond and mortgage markets. A money market is the trading of highly liquid financial instruments with a duration of one year or less and includes the trading of Treasury bills. Furthermore, bonds are long term investments, with a duration greater than 1 year and are issued by corporations and the U.S. government. In addition, the mortgage market creates loans to finance the real estate market. Once mortgages are issued on a property, banking institutions securitize the mortgages and sell them on the secondary market (CSU Global, 2016). Due to the scale of these three markets they have an extensive impact on the monetary supply and economy.

A. fixed-for-floating rate interest rate swap, where one counterparty exchanges the interest payments of a floating- rate debt obligations for fixed-rate interest payments of the other counter party

Preferred stock has a preferred position in the claim on the income flow of the firms. Preferred stock dividends, usually a fixed rate relative to par value, are paid ahead of common stock dividends. The dividends of preferred stocks are different from and generally greater than those of common stock. Corporate bonds are debt instruments created by companies for the purpose of raising capital. They are called fixed-income securities because they pay a specified amount of interest on a regular basis. Preferred and Common stocks have three major risk factors: 1) dividend suspension or company failure, 2) rising interest rates, 3) low trading volumes. Most corporate bonds are debentures, meaning they are not secured by collateral. Investors of such bonds must assume not only interest rate risk but also credit risk; they chance that the corporate issuer will default on its debt

| Attempt made to analyse a financial issue incorporating discipline knowledge and theory, but only minimal understanding of the issue is evident; Analysis addresses some aspects of the issue, but key elements are not

Finance assets or the financial worth the assets, such as cash. The factory, machine, and tools owned by a firm and used for process and production.

We are pleased to present to you the salient features of our proposed $5B convertible debt offering for your careful review and approval. We deemed it appropriate to walk you through the analytical process in coming up with the right mix of conversion premium and coupon rate. We initially consider a conversion premium of 25% and determine its corresponding coupon rate. We then explore the appropriateness of such a premium and explore other conversion premium-coupon rate combinations and determine which combination would be optimal for both the

Sherman, M. B., Weston, H. A., Willey, S. L., & Mansfield, N. R. (2014). Risky

Future Economic benefits- The asset has the capacity to serve the entity by being exchanged used to produce or settle liabilities.

(2) Because in a financial activities, if one side want to use fixed rate while the other side want to use floating rate. Then they can exchange. Also, if one party has comparative advantage in fixed rate and the other has comparative advantage in floating, after swap, they can reduce capital cost and interest

Understanding how to properly value a vanilla bond is essential for finance (ctuonline.edu). In theory, the present value relationship determines the value of a bond, but in practice the actual price is (typically) determined by suggestions from other, more liquid mechanisms. The purpose of this work will be to research bonds offered by Safeway (SWY), analyze them, and then decide in what situation these bonds would be beneficial for the investor.

With a swap, banks could invest in short term, highly liquid securities with stable principal values. By creating receive fixed swap on long dated securities, banks could enhance their short term liquidity along with enjoying the benefits of investing long term. This way banks could address the sudden customer withdrawals and repayment of shorter CDs as they mature. Swaps greatly improved bank’s liquidity.

Swaps can also improve the bank’s liquidity - It can invest in short-term instruments and thus avoid locking in its funds in long-term securities. At the same time it can add swaps to its portfolio in order to mitigate some of the interest rate risk involved in the investment of short-term

The rationale is that as interest rates increase, the opportunity cost of holding a bond decreases since investors are able to realize greater yields by switching to other investments that reflect the higher interest rate. For example, a 5% bond is more valuable if interest rates decline since the bondholder receives a fixed rate of return relative to the market, which is offering a lower rate of return as a result of the decrease in rates.

“Asset-Liability Management (ALM) can be defined as the ongoing process of formulating, implementing, monitoring and revising strategies related to assets and liabilities to achieve an organization 's financial objectives, given the organization 's risk tolerances and other constraints”[1]. ALM also is known as balance sheet management.

* Companies have incentive to raise convertible debt, rather than traditional debt, because the interest payments on convertible securities are usually lower, thus