Corporate Finance (The Mcgraw-hill/Irwin Series in Finance, Insurance, and Real Estate)
11th Edition
ISBN: 9780077861759
Author: Stephen A. Ross Franco Modigliani Professor of Financial Economics Professor, Randolph W Westerfield Robert R. Dockson Deans Chair in Bus. Admin., Jeffrey Jaffe, Bradford D Jordan Professor
Publisher: McGraw-Hill Education
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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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A company FORTIS, issued a 5 years loan with a gloating rate EURIBOR + 0.75%. It sets up a fixed / variable swap with a bank. The quotation of the swap is as follows: 5-year swap: EURIBOR /3.75%.
What is the cost of borrowing of this company after swap?
a. 0.75%b. 4.5%c. EURIBOR + 4.5%d. None of the above
Current USD Interest rates are 7% per annum and AUD rates are 9% per annum, flat for all terms. Current value of AUD is 0.62 USD. Under a FX swap agreement, a financial institution pays 8% per annum in AUD and receives 4% per annum in USD. Notional principals are 12 Million USD and 20 Million AUD. Payments are exchanged every year, with one exchange having just taken place. The swap will last 5 more years. What is the value of the swap to the financial institution?
! Required information On January 1, 2024, Avalanche Corporation borrowed $102, 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…
Chapter 25 Solutions
Corporate Finance (The Mcgraw-hill/Irwin Series in Finance, Insurance, and Real Estate)
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 - Prob. 1QPCh. 25 - Prob. 2QPCh. 25 - Prob. 3QPCh. 25 - Prob. 4QPCh. 25 - Prob. 5QPCh. 25 - Duration What is the duration of a bond with three...Ch. 25 - Duration What is the duration of a bond with four...Ch. 25 - Duration Blue Stool Community Bank has the...Ch. 25 - Prob. 9QPCh. 25 - Prob. 10QPCh. 25 - Prob. 11QPCh. 25 - Prob. 12QPCh. 25 - Prob. 13QPCh. 25 - Forward Pricing You enter into a forward contract...Ch. 25 - Forward Pricing This morning you agreed to buy a...Ch. 25 - Prob. 16QPCh. 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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