5. The Acme Insurance Company purchased a 5-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 the insurance company purchases this bond, it enters into a floor agreement with the Bear Stearns in which the notional amount is $35 million with a strike price of 6%. The premium Acme Insurance Company agrees to pay Bear Stearns each year is $300,000 a) Suppose at the time that it is necessary to determine whether a payment must be made by Bear Stearns, LIBOR is 9%. How much must Bear Stearns pay to Acme Insurance Company? b) Suppose at the time that it is necessary to determine whether a payment must be made by Bear Stearns, LIBOR is 3%. How much Bear Stearns pay to Acme Insurance Company?
Debenture Valuation
A debenture is a private and long-term debt instrument issued by financial, non-financial institutions, governments, or corporations. A debenture is classified as a type of bond, where the instrument carries a fixed rate of interest, commonly known as the ‘coupon rate.’ Debentures are documented in an indenture, clearly specifying the type of debenture, the rate and method of interest computation, and maturity date.
Note Valuation
It is the process to determine the value or worth of an asset, liability, debt of the company. It can be determined by many processes or techniques. Many factors can impact the valuation of an asset, liability, or the company, like:
5. The Acme Insurance Company purchased a 5-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 the insurance company purchases this bond, it enters into a floor agreement with the Bear Stearns in which the notional amount is $35 million with a strike price of 6%. The premium Acme Insurance Company agrees to pay Bear Stearns each year is $300,000
a) Suppose at the time that it is necessary to determine whether a payment must be made by Bear Stearns, LIBOR is 9%. How much must Bear Stearns pay to Acme Insurance Company?
b) Suppose at the time that it is necessary to determine whether
a payment must be made by Bear Stearns, LIBOR is 3%. How much Bear Stearns pay to Acme Insurance Company?
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