1. How large should the discount (X) be to make this an attractive deal for Rabobank?

2. How large must the annual fee (F) be to make this an attractive deal for Morgan Guaranty?

3. How small must the combination of F and X be to make this an attractive deal for B.F. Goodrich?

4. Is this an attractive deal for the savings banks?

5. Is this a deal where everyone wins? If not, who loses?

Introduction:

Players: Morgan Bank, Rabobank, and B.F. Goodrich, Salomon Brothers, Thrift Institutions and Saving Banks

Goodrich:

In early 1983, Goodrich needed $50 million to fund its ongoing financial needs. However, Goodrich was reluctant to borrow (short term debt) from its committed bank lines because of the following reasons:

1. It*…show more content…*

• Invest in short term treasury bills, large CD’s of commercial banks.

• Floating rate notes of major US banks whose yields were tied to the Treasury bill notes.

• Buy Goodrich floating rate notes with a yield tied to the LIBOR.

Structuring of the Swap:

In the swap depicted above the following can be calculated:

1. Goodrich receives the following amount semi annually:

-(LIBOR+0.5%)+(LIBOR-x1)-10.7% = x1+11.2%

2. Morgan receives the following amount as fees: -(LIBOR-x1)+(LIBOR-x2)+10.7%-10.7% = x1-x2.

Note: As stated in the case (footnote #2 on page 362) this fee can be anywhere between 8 basis points and 37.5 basis points.

3. Rabobank receives following amount semi annually: -(LIBOR-x2)+10.7%-10.7% = x2-LIBOR i.e. it will give out LIBOR – x2.

From exhibit 3 the following is also given:

4. Since Goodrich has BBB- credit rating it could raise capital at a fixed rate probably at 12.5% for 7-10 years.

5. Also, Rabobank could raise floating rate debt at LIBOR – 1/8% (LIBOR + ¼% - 3/8%) since it is an AAA rated bank.

Therefore,

6. From (1), and 4, Goodrich saves the following amount in semiannual interest payments : 12.5% - (x1+11.2%) = 1.3%-x1.

7. From (2), and (5) Rabobank saves the following amount in semiannual interest payments: LIBOR – 1/8% - (LIBOR –x2) = x2 – 1/8%.

8. For this deal to occur,

2. How large must the annual fee (F) be to make this an attractive deal for Morgan Guaranty?

3. How small must the combination of F and X be to make this an attractive deal for B.F. Goodrich?

4. Is this an attractive deal for the savings banks?

5. Is this a deal where everyone wins? If not, who loses?

Introduction:

Players: Morgan Bank, Rabobank, and B.F. Goodrich, Salomon Brothers, Thrift Institutions and Saving Banks

Goodrich:

In early 1983, Goodrich needed $50 million to fund its ongoing financial needs. However, Goodrich was reluctant to borrow (short term debt) from its committed bank lines because of the following reasons:

1. It

• Invest in short term treasury bills, large CD’s of commercial banks.

• Floating rate notes of major US banks whose yields were tied to the Treasury bill notes.

• Buy Goodrich floating rate notes with a yield tied to the LIBOR.

Structuring of the Swap:

In the swap depicted above the following can be calculated:

1. Goodrich receives the following amount semi annually:

-(LIBOR+0.5%)+(LIBOR-x1)-10.7% = x1+11.2%

2. Morgan receives the following amount as fees: -(LIBOR-x1)+(LIBOR-x2)+10.7%-10.7% = x1-x2.

Note: As stated in the case (footnote #2 on page 362) this fee can be anywhere between 8 basis points and 37.5 basis points.

3. Rabobank receives following amount semi annually: -(LIBOR-x2)+10.7%-10.7% = x2-LIBOR i.e. it will give out LIBOR – x2.

From exhibit 3 the following is also given:

4. Since Goodrich has BBB- credit rating it could raise capital at a fixed rate probably at 12.5% for 7-10 years.

5. Also, Rabobank could raise floating rate debt at LIBOR – 1/8% (LIBOR + ¼% - 3/8%) since it is an AAA rated bank.

Therefore,

6. From (1), and 4, Goodrich saves the following amount in semiannual interest payments : 12.5% - (x1+11.2%) = 1.3%-x1.

7. From (2), and (5) Rabobank saves the following amount in semiannual interest payments: LIBOR – 1/8% - (LIBOR –x2) = x2 – 1/8%.

8. For this deal to occur,

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