Suppose that Dummy Ltd. can invest $100mil long-term at a return of 8% p.a. and Intelligent Ltd. can invest $100mil short-term at a return equal to the 6-month LIBOR rate plus a spread of 100 bps. Both companies agree to enter into an interest rate swap agreement whereby Dummy Ltd. receives the LĪBOR rate plus 50 bps. from Intelligent Ltd., and Intelligent Ltd. received 8.5% p.a. fixed from Dummy Ltd. What is the net return to each company? A.Net return to Dummy Ltd. = LIBOR rate + 100 bps. Net return to Intelligent Ltd. = 9% р.а. B. Net return to Dummy Ltd. = 9% p.a. Net return to Intelligent Ltd. = LIBOR rate. C.Net return to Dummy Ltd. = LIBOR rate. Net return to Intelligent Ltd. = 9% p.a D.Net return to Dummy Ltd. = LIBOR rate. Net return to Intelligent Ltd. = 8% p.a. %3D %3D %3D

Suppose that Dummy Ltd. can invest $100mil long-term at a return of 8% p.a. and Intelligent Ltd. can invest $100mil short-term at a return equal to the 6-month LIBOR rate plus a spread of 100 bps. Both companies agree to enter into an interest rate swap agreement whereby Dummy Ltd. receives the LĪBOR rate plus 50 bps. from Intelligent Ltd., and Intelligent Ltd. received 8.5% p.a. fixed from Dummy Ltd. What is the net return to each company? A.Net return to Dummy Ltd. = LIBOR rate + 100 bps. Net return to Intelligent Ltd. = 9% р.а. B. Net return to Dummy Ltd. = 9% p.a. Net return to Intelligent Ltd. = LIBOR rate. C.Net return to Dummy Ltd. = LIBOR rate. Net return to Intelligent Ltd. = 9% p.a D.Net return to Dummy Ltd. = LIBOR rate. Net return to Intelligent Ltd. = 8% p.a. %3D %3D %3D

Essentials Of Investments

11th Edition

ISBN:9781260013924

Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Chapter1: Investments: Background And Issues

Section: Chapter Questions

Problem 1PS

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Suppose you have a 2.5-year remaining on an interest rate swap with a notionalprincipal of $10, 000, 000 between Company A and Company B. Company A pays fixed rateand Company B pays the float rate. Fixed and float payments are exchanged every year andthe last payment was exchanged 6 months ago. The fixed rate is 3.5% per annum, and thefloating rate is tied to the annual LIBOR. The previous 1-year LIBOR rate, set 6 months ago,is 2.75%, 6 month LIBOR is 3.25%. the 1.5-year LIBOR is 3.25%, and the 2.5-year LIBOR is3.50%.Calculate the present value of the fixed and floating legs of the swap, and determine the swap’snet present value from Company A’s perspective. Assume annual compounding for discounting.
On 1 July 2018 BMW Ltd issues $2 million in 10-year debentures that pay interest each six months at a coupon rate of 10 per cent. At the time of issuing the securities, the market requires a rate of return of 12 per cent. Interest expense is determined using the effective-interest method. Formula for PV of $1 in n periods =1/(1+k)n Formula for present value of annuity of $1 per period for n periods = (1-1/ (1+k)n ) ÷ k where k is discount rate expressed in decimal Required: (i) Determine the issue price of the debenture. (ii) Provide the journal entries at 1 July 2018 and 30 June 2019.
ABC Corporation will be investing in JKL corporate bonds with face value of $1,600,000, coupon rate of 8%, interests payable quarterly, and remaining term of three years. ABC requires a minimum return from this investment at 8.5%. How much should ABC be willing to pay as maximum price for this investment?
Edgar Ltd issues $7 million in 6-year, 10%, semi-annual coupon debentures. The rate of return required by the market is 8% per annum. What is the journal entry to record the first payment of interest assuming using the effective-interest method to amortise any discount or premium (rounded to the nearest dollar)?
PK Ltd issues $8 million in 5-year debentures that pay interest every 6 months at a coupon rate of 12% per annum. The required market rate of return is 16% per annum. What is the issue price of the debentures (rounded to the nearest dollar)?
A. Nii Laryea purchased a T-bill with a GHC10,000 par value for GHC9,465. One hundred days later, Nii sells the t-bill for GHC9,650. Assuming 365 days in a year, what is Nii Laryea’s expected annualized yield from the transaction? B. Assume investors require a 5% annualized return on a six-month t-bill with a par value of GHC10,000. The price investors would be willing to pay in cedis will be?
In a given securities market, an investment at time t=0 of £95 generates a return of £105 at time t=2 years. However, an investment of £95 at time t=2 (which is agreed from the outset) generates a return of £108 at time t=5 years. Given that the 5-year par yield is 5.3%, calculate, to two decimal places, the current price of a 5-year bond of £10,000 nominal paying coupons at a rate of 4.5% per annum and redeemed at 95%.
A sale of fifteen-year debentures with a total value of $30 million. The nominal value is $3,000 and an interest rate of 11% per year. Since bonds of similar risk earn returns greater than 11%, the firm must sell the bonds for $2,800 to offset the lower coupon interest rate. The financial costs paid to the investment banker correspond to 4% (flotation cost) of the nominal value of the obligation. Calculate pre-tax issuance cost, Kd, and long-term debt cost, ki, assuming the rate is 15%
A commercial bill with a face value of $100,000 and 270 days to maturity is purchased with a yield to maturity of 4.65 per cent per annum. After the bill has been held for 110 days it is sold at a yield of 4.5 per cent per annum. What rate of return was earned by the original holder of the bill; that is, what is the holding period yield? Show your working.
A debenture has the following characteristics principal amount shs 1000 term to maturity 20 years coupon rate 16 % interest payments semiannual required : calculate the price of the debenture if the market interest rate is 20% 16% 12% Comment o the above results
1) Assume that the risk-free rate is 7% per annum (continuous compounding) for all maturities. Compute the three-month forward prices of the following assets: i) A share that will distribute a $8 dividend in 2 months and a $12 dividend in six months. The current spot price of the share is $85. ii) The Swiss franc. The current spot price is 1.4 dollars for 1 Swiss franc and the foreign (i.e., the Swiss) risk-free rate is 6% per annum (continuous compounding).
Assume that Epping Co. expects to receive S$500,000 in one year. Epping created a probability distribution for the future spot rate in one year as follows: Future Spot Rate $.68 Probability 20% 62 50 30 61 Assume that one-year put options on Singapore dollars premium of $.04 per unit. One-year call options on Singapore dollars are available with an exercise price of S.60 and a premium of $.03 per unit. a are available, with an exercise price of $0.63 and Use the appropriate options hedge to determine whether the firm would exercise the option using each of the three different spot rates i.e. what would the firm do if each spot rate existed at the time it is considering exercising the option (assume the option is about to expire). Then, show the total amount of receivables (in US dollars) based on the appropriate strategy that would be implemented for each of the three spot rates. Indicate whether the amount would be a maximum or a minimum or neither.

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