A financial institution has entered into an interest rate swap with company X. Under the terms of the swap, it receives 5% per annum and pays six- month LIBOR on a principal of $5 million for five years. Payments are made every six months. Suppose that company X defaults on the sixth payment date (end of year 3) when the six-month forward LIBOR rates for all maturities are 3% per annum. Assume that six-month LIBOR was 3.5% per annum halfway through year 3 and that at the time of default all OIS rates are 2.5% per annum. OIS rates are expressed with continuous compounding; other rates are expressed with semiannual compounding. The loss to the financial institution is closest to: O a. $231,365 O b. $347,048 O c. $462,730

A financial institution has entered into an interest rate swap with company X. Under the terms of the swap, it receives 5% per annum and pays six- month LIBOR on a principal of $5 million for five years. Payments are made every six months. Suppose that company X defaults on the sixth payment date (end of year 3) when the six-month forward LIBOR rates for all maturities are 3% per annum. Assume that six-month LIBOR was 3.5% per annum halfway through year 3 and that at the time of default all OIS rates are 2.5% per annum. OIS rates are expressed with continuous compounding; other rates are expressed with semiannual compounding. The loss to the financial institution is closest to: O a. $231,365 O b. $347,048 O c. $462,730

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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Insurance company, IHI, is part of a swap agreement with investment bank Lachlin Bank on a notional principal of $100 million. IHI has agreed to pay Lachlin Bank the six month BBSW rate and receives 7% pa, convertible half-yearly. If the swap has a residual life of 18 months, and the next interest payment is due in six months, calculate the value of the swap for Lachlin, given BBSW rates (compounding continuously) for the corresponding 6, 12 and 18 month maturities are 6.91% pa, 7.3% pa, 7.35% pa and the half year BBSW rate on the next payment is known to be 7% pa compounding half-yearly. Give your answer in millions of dollars to 2 decimal places. Value = $ million
Incredible Inc., a manufacturer of children’s toys, enters into a two-year plain vanilla interest rate swap, in which the corporation will receive a fixed rate and pay a floating rate of LIBOR. The notional amount on this swap is $75 million. Swap payments will be netted every 180 days, and the LIBOR requires the assumption of a 360-day year. The term structure of LIBOR on the swap initiation date is as follows: Days Rate (%) 180 3.50 360 3.55 540 3.60 720 3.70 a. What is the fixed rate determined on the swap initiation date? b. Calculate the swap value on the initiation date.
V5. Suppose that some time ago a financial institution agreed to receive 6-month LIBOR and pay 4% per annum (with semi-annual compounding) on a notional principal of $200 million. The swap has a remaining life of 1.25 years; assume that the payments are to be exchanged every 6 months. The LIBOR rates with continuous compounding for 3-month, 9-month, and 15-month maturities are 3.8%, 4.2%, and 4.4%, respectively. The 6-month LIBOR rate at the last payment date was 3.9% (with semiannual compounding). Suppose that the day count convention is ignored. Calculate the current value of the swap (in terms of bond prices) to the financial institution.
X has a 3 million dollar floating rate loan which is re-set every six months. The company wants to protect itself against a rising interest rate in the next six months. It purchases a 3% 6 v/s 12 Forward Rate Agreement ( FRA ) on a notional amount of 3 million dollar. At the start date of the FRA, the market interest rate on floating rate debt is 3.5 % per annum. (i) Calculate the amount receivable by X from the writer of the FRA at the beginning of the FRA period, assuming 30-day months in a year.(ii) Calculate the interest payable by X to the providers of finance at the end of month 12. (ii) Calculate the actual interest cost of the loan and justify your answer.
Six months ago, Thomas Group entered a one-year interest rate swap with its bank, paying fixed and receiving floating every quarter, according to the 3-month rate with nominal amount of $10 million. Following is the rates information when swap was entered, the rates information three months ago, and the rates information today. Note that all rates are annual and quarterly compounding. Keep at least 6 decimal points during your calculation. 3-month 6-month 9-month 12-month Six Months Ago 3.50% 3.80% 4.00% 4.00% Three Months Ago 3.80% 4.00% 4.50% 4.80% Now 4.80% 4.80% 5.00% 5.20% a. What are the amounts of money Thomas Group received or paid over past six months? b. What is the current market value of the interest rate swap Thomas Group is holding?
Netflix company has entered into a plain vanilla interest rate swap on $2,500,000 notional principal. The company pays fixed rate of 7.0% on payments that occur at 60-day intervals. Six payments remain with the next one due in exactly 60 days. On the other side of the swap, the company receives payments based on the LIBOR rate. Describe the transaction that occurs between the company and the dealer at the end of the first period if the appropriate LIBOR rate is 8.5%.
An investor who owns a interest rate swap pay six-month LIBOR and receive 18.1% (semi-annual compounding) on a principal of 95 million Euro. The remaining life of this swap is 15 months (1.25 years). The LIBOR rates for 3m, 9m and 15m are 19.1%, 19.6%, and 20.1% (continuous compounding), and the 6-month LIBOR on the last payment date (the most recent reset date) was 19.3% (semi-annual compounding). Calculate the value of the swap (in millions):
You enter into a five-to-eight-month forward rate agreement with a firm. You agree to lend the firm a 3-month loan of $5 million starting 5 months from now, with a quarterly compounded forward interest rate of 2.5% per annum. Currently, the continuously compounded 5-month and 8-month interest rates are 3% per annum and 3.5% per annum, respectively. 1) What is the implied forward rate for the 3-month period starting 5 months from now? 2) What is the present value of this forward rate agreement to you now?
Styles c)A swap agreement calls for Grand Industries to pay interest annually based on a rate of 1% over the one year T bill rate, currently 6%. In return, Grand receives interest at a rate of 6% on a fixed rate basis. The notional principal for the swap is $ 500000| What is Grand's net interest for the year after the agreement?
Use the following information for the next two questions:On January 1, 20x1, ABC Co. obtained a five-year, ₱1,000,000 variable-rate loan with interest paymentsdue at each year-end and the principal due on December 31, 20x5.As protection from possible fluctuations in current market rates, ABC Co. enters into an interest rateswap for the whole principal of the loan. Under the agreement, ABC Co. shall receive variable interestand pay fixed interest based on a fixed rate of 8%. Swap payments shall be made at each year-end.The following are the current market rates: Jan. 1, 20x1 8% Jan. 1, 20x2 9% Jan. 1, 20x3 12% 62. How much is the fair value of the interest rate swap on December 31, 20x1? (Indicate whether it is aderivative asset or liability.)a. 32,397 assetb. 32,397 liabilityc. 46,884 assetd. 53,223 liability63. How much is the fair value of the interest rate swap on December 31, 20x2? (Indicate whether it is aderivative asset or liability.)a. 83,294 assetb. 83,294…
Zee Ltd has a 3 million dollar floating rate loan which is re-set every six months. The company wants to protect itself against a rising interest rate in the next six months. It purchases a 3% 6 v/s 12 Forward Rate Agreement ( FRA ) on a notional amount of 3 million dollar. At the start date of the FRA, the market interest rate on floating rate debt is 3.5 % per annum. (i) Calculate the interest payable by Zee Ltd to the providers of finance at the end of month 12. (ii) Calculate the actual interest cost of the loan and justify your answer.
A loan of £10,200 is to be repaid over a 11-year contract by three initial payments of £1,000, £2,000 and £3,000 at the end of years 2, 5 and 10, respectively. Hence, find a final amount £X at the end of year 11 that needs to be paid to fully clear the debt given that the lender charges an annual nominal rate of interest of 7.3% convertible quarterly. (correct answer = 14374.82, no tables, please ONLY formulas)

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