CORPORATE FINANCE--CONNECT ACCESS CARD
12th Edition
ISBN: 9781264807475
Author: Ross
Publisher: MCG CUSTOM
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Chapter 25, Problem 14CQ
Summary Introduction
To explain: Reason, for Company S using the swap agreement and to go ahead and issue floating rate bonds because the net effect of issuing fixed rate bonds and then doing a swap is to create a variable rate bond.
Interest Rate Swap:
Swapping the interest rate helps the companies by allowing them to exchange their interest payments at the decided amount for a mutually agreed period of time. It is done to hedge towards adverse interest rate movements and to get a balance between fixed and variable debt.
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15. The table below presents the costs of borrowing for Caterpillar and Tesla, and the a
Swap Bank quote against LIBOR. Caterpillar would like to get a $5,000,000.00 floating
rate loan. Tesla would like to get a $5,000,000.00 fixed rate loan. How much can Tesla
save each year by entering a swap agreement?
(a) $37,000
(b) $9,500
(c) $8,000
(d) $27,500
Fixed-Rate
Borrowing Cost
Floating-Rate
Borrowing Cost
Caterpillar
Tesla
3.00
6.50
LIBOR
LIBOR +2.60
Swap Bank Quote
Bid
Ask
3.19%
3.74%
(e) None of the above
The table below presents the costs of borrowing for Caterpillar and
ExxonMobil, and a Swap Bank quote against LIBOR. Caterpillar would like to
get a floating rate
loan. ExxonMobil would like to get a fixed rate loan. How much can Caterpillar
save by entering a swap agreement?
Caterpillar
ExxonMobil
Swap Bank Quote
33 bps
Ⓒ7 bps
23 bps
None of the alternatives
10 bps
Fixed-Rate Borrowing
Costs
4
5.5
Bid
4.1%
Floating-Rate Borrowing
Cost
Libor
Libor+1.1
Ask
4.33%
Use the following information about an interest rate SWAP contract to answer the following question. Assume ½ for the date count fraction. (Do not round intermediate calculations.)
If Bank of America wants to make a book P/L of $30,000, what adjustment should it make to its LIBOR floating payments?
Counter Parties
Notional Principal
Fixed Rate payer
Fixed Rate
Floating Rate Payer
Floating Rate
Floating Rate Reset
Effective date
Maturity Date
Barclays & Bank of America
$8,000,000
Barclays
6% (s.a.)
Bank of America
LIBOR+???bp (s.a.)
6 months
December 21, 2020
December 21, 2023
Term (Years) Pay rate zero
Discount Factor
Receive rate zero
0.5
5.25%
0.9747
5.33%
Discount Factor
0.9744
1
5.78%
0.9454
5.88%
0.9445
1.5
5.97%
0.9167
6.17%
0.9141
2
6.22%
0.8863
6.33%
0.8845
2.5
6.31%
0.8582
6.43%
0.8557
3
6.39%
0.8304
6.51%
0.8276
Provide you answer in basis points, rounded to two decimal points. Recall that 1% = 100 basis points. The following numbers are meant to provide guidance for…
Chapter 25 Solutions
CORPORATE FINANCE--CONNECT ACCESS CARD
Ch. 25 - Prob. 1CQCh. 25 - Prob. 2CQCh. 25 - Prob. 3CQCh. 25 - Prob. 4CQCh. 25 - Prob. 5CQCh. 25 - Prob. 6CQCh. 25 - Option Explain why a put option on a bond is...Ch. 25 - Hedging Interest Rates A company has a large bond...Ch. 25 - Prob. 9CQCh. 25 - Prob. 10CQ
Ch. 25 - Prob. 11CQCh. 25 - Prob. 12CQCh. 25 - Prob. 13CQCh. 25 - Prob. 14CQCh. 25 - Hedging Strategies William Santiago is interested...Ch. 25 - Prob. 16CQCh. 25 - What is the monthly mortgage payment on Jerrys...Ch. 25 - Prob. 2MCCh. 25 - Prob. 3MCCh. 25 - Prob. 4MCCh. 25 - Suppose that in the next three months the market...Ch. 25 - Are there any possible risks Jennifer faces in...
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- Required: Japan Life Insurance Company invested $10,000,000 in pure-discount U.S. bonds in May 1995 when the exchange rate was 80 yen per dollar. The company liquidated the Investment one year later for $10,700,000. The exchange rate turned out to be 110 yen per dollar at the time of liquidation. What rate of return did Japan Life realize on this investment in yen terms? Note: Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places. Rate of retum %arrow_forwardAmazon would like to get a floating rate loan $10,000,000. It can borrow at 7.93% or Libor + 1%. A swap bank quotes 7.49 - 7.65 against flat Libor. How much can Amazon save (in basis points) by entering a swap agreement? 56arrow_forwardYou are the party paying pounds and receiving euro and wanted to get out of a swap that you entered into 8 years ago, what specific strategy could you use with forward contracts to defease the swap?arrow_forward
- An overnight repurchase agreement has a party providing US Treasury securities for 98.5500 with a repurchase price of 98.5750. What is the repo rate? (Answer in percentage points to the third decimal, so 2.525% would be "2.525")arrow_forwardSuppose that some time ago a financial institution entered into a swap where it agreed to make semiannual payments at a rate of 3.5% per annum and receive LIBOR on a notional principal of $300 million. The swap now has a remaining life of 1.15 years. Payments will therefore be made 0.15, 0.65, and 1.15 years from today. The risk-free rates with continuous compounding for maturities of 0.15, 0.65, and 1.15 years are 2.8%, 3.2%, and 3.4%, respectively. We suppose that the forward LIBOR rates for the 0.15-to- 0.65 year and the 0.65-to-1.15 year periods are 3.4% and 3.7%, respectively, with semiannual compounding. The LIBOR rate applicable to the exchange in 0.15 years was determined 0.35 years ago. Suppose it is 2.9% with semiannual compounding. What is the floating cash flow at time 1.15 (in $ millions)?arrow_forwardA company can borrow funds at LIBOR minus 50 basis points. There is a swap available where one side pays 7% and the other side pays LIBOR-1%. The company is concerned that interest rates will increase and, thus, wants to change the nature of its liability from paying floating to paying fixed rate. What rate can the company pay on its lability after it engages in the swap?arrow_forward
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