ESS. OF INVESTMENTS - ETEXT ACCESS CARD
ESS. OF INVESTMENTS - ETEXT ACCESS CARD
11th Edition
ISBN: 9781265909055
Author: Bodie
Publisher: MCG
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Chapter 17, Problem 26C
Summary Introduction

(A)

Adequate information:

Total issue of floating-rate bonds = $10 million

Interest payments on floating-rate bond: (LIBOR + 1%) on $10 million par value

In the swap market, the offered rate is 7% for LIBOR

To evaluate:

Swap arrangement to convert firm's borrowings to a synthetic fixed-rate loan

Introduction:

An interest rate swap is a forward contract in which one stream of future interest payments is exchanged for another based on a specified principal amount. Interest rate swaps usually involve the exchange of a fixed interest rate for a floating rate, or vice versa, to reduce or increase exposure to fluctuations in interest rates or to obtain a marginally lower interest rate than would have been possible without the swap.

Summary Introduction

(B)

Adequate information:

Total issue of floating-rate bonds = $10 million

Interest payments on floating-rate bond: (LIBOR + 1%) on $10 million par value

In the swap market, the offered rate is 7% for LIBOR

To evaluate:

Interest rate the firm will pay on the synthetic fixed-rate loan

Introduction:

An interest rate swap is a forward contract in which one stream of future interest payments is exchanged for another based on a specified principal amount. Interest rate swaps usually involve the exchange of a fixed interest rate for a floating rate, or vice versa, to reduce or increase exposure to fluctuations in interest rates or to obtain a marginally lower interest rate than would have been possible without the swap.

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