EBK INVESTMENTS
11th Edition
ISBN: 9781259357480
Author: Bodie
Publisher: MCGRAW HILL BOOK COMPANY
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Chapter 23, Problem 23PS
a.
Summary Introduction
To evaluate: The reason behind the harm done to Firm ABC by the default as per the given information.
Introduction:
PVIFA: It is an acronym for the present value interest factor of the
b.
Summary Introduction
To compute: The market value of the loss incurred by ABC as a result of the default.
Introduction:
PVIFA: It is an acronym for the present value interest factor of the
c.
Summary Introduction
To evaluate: The treatment of swap in case of reorganization of the firm if ABC has gone bankrupt.
Introduction:
Swap: By swapping, the companies are benefitted by hedging against interest rate exposure. This is possible only when the uncertainty of cash flows is reduced.
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A client of a financial institution that is a counterparty to a four-year plain-vanilla interest rate swap has declared bankruptcy. Exactly 16 months remain until the swap matures. In the swap, the financial institution receives 4% per annum fixed rate and pays six-month Australian dollar (AUD) libor based on a principal of AUD10 million. The next floating rate payment would have been at the rate of 3.5% p.a. For all maturities, the continuously compounded AUD interest rate is 3% per annum. What is the value of the potential loss to the financial institution?
ABC Co. entered a forward contract to hedge a ¥100,000,000 which the company expects to pay in 90 days. The contract calls for ABC Co. to deliver yen (¥) at ¥111.25 per U.S. dollar. If on the delivery date, the spot rate is ¥109.75 per U.S. dollar. How much is the gain (loss) on the hedge?
On January 1, 2024, Avalanche Corporation borrowed $120,000 from First Bank by issuing a two-year, 8% fixed-rate note with annual interest payments. The principal of the note is due on December 31, 2025.
Avalanche wanted to hedge against declines in general interest rates, so it also entered into a two-year SOFR-based interest rate swap agreement on January 1, 2024, and designates it as a fair value hedge. Because the swap is entered at market rates, the fair value of the swap is zero at inception.
The agreement called for the company to receive fixed interest at the current SOFR swap rate of 5% and pay floating interest tied to SOFR. This arrangement results in an effective variable rate on the note of SOFR + 3%.
The contract specifies that the floating rate resets each year on June 30 and December 31 for the net settlement that is due the following period. In other words, the net cash settlement is calculated using beginning- of-period rates.
The SOFR rates on the swap reset dates…
Chapter 23 Solutions
EBK INVESTMENTS
Ch. 23 - Prob. 1PSCh. 23 - Prob. 2PSCh. 23 - Prob. 3PSCh. 23 - Prob. 4PSCh. 23 - Prob. 5PSCh. 23 - Prob. 6PSCh. 23 - Prob. 7PSCh. 23 - Prob. 8PSCh. 23 - Prob. 9PSCh. 23 - Prob. 10PS
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