Intermediate Financial Management
14th Edition
ISBN: 9780357516782
Author: Brigham, Eugene F., Daves, Phillip R.
Publisher: Cengage Learning
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Chapter 24, Problem 10MC
Summary Introduction
Case summary: A mid-sized company TSI has hired a financial analyst. The company creates the exotic sauces from imported fruits and vegetables. The CEO of the company has asked the financial analyst to make a report on enterprise risk management thus company’s executive may gain knowledge about enterprise risk management as no one knows about it in the organization.
To discuss: Swap ,and fixed versus floating interest rate swap among company Hi and company Lo in which Lo creates a side payment of 45 basis points to company L.
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Counterparty A can borrow from the floating
rate market at LIBOR + 0.5% and
Counterparty B can borrow from the
Eurobond market at 7%. If Counterparty A
pays 7.35% into the swap and Counterparty B
pays the LIBOR rate plus 0.5% into the swap,
then the overall cost to borrow by
Counterparty B is:
a.
7.85%
b.
LIBOR + 0.5%
С.
7%
d.
LIBOR + 7.5%
е.
7.35%
Company A can borrow money at a fixed rate of 9 percent or a variable rate set at prime plus 1 percent. Company B can borrow money at a variable rate of prime plus 2 percent or a fixed rate of 8.25 percent. Company A prefers a fixed rate and company B prefers a variable rate. A swap dealer can bring them together for a commission of 1% on the swap deal.
1. Show a swapping arrangement, ensuring that both Company A and B are better off and the swap dealer gets the 1% cut.
Company A can borrow money at a fixed rate of 9 percent or a variable rate set at prime plus 1 percent. Company B can borrow money at a variable rate of prime plus 2 percent or a fixed rate of 8.25 percent. Company A prefers a fixed rate and company B prefers a variable rate. A swap dealer can bring them together for a commission of 1% on the swap deal.
a) Compute the potential gain for the concerned parties through the swap deal?
b) Show a swapping arrangement, ensuring that both Company A and B are better off and the swap dealer gets the 1% cut.
Chapter 24 Solutions
Intermediate Financial Management
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- (Following Rates are Quoted) Company A Company B Credit Rating A B Fixed Rate 6% 8% Floating Rate LIBOR+1% LIBOR+1.5% Which company has a relative advantage and in which market? Which company has an absolute advantage and in which market Company A wants to borrow floating. Company B wants to borrow fix. Build a proper SWAP that benefit the two companies.arrow_forwardUse 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…arrow_forwardImagine that the table above outlines deposits rates. Assuming A wants a fixed rate deposit and B wants a floating rate deposit, design the swap that would split the net gain in proportion 3:1 between A and B (A=3 : B=1).arrow_forward
- A 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_forwardSuppose that at the present time, one can enter 5-year swaps that exchange LIBOR for 5%. An off-market swap would then be defined as a swap of LIBOR for a fixed rate other than 5%. For example, a firm with 7% coupon debt outstanding might like to convert to synthetic floating-rate debt by entering a swap in which it pays LIBOR and receives a fixed rate of 7%. What up-front payment will be required to induce a counterparty to take the other side of this swap? Assume notional principal is $10 million.arrow_forwardSuppose that at the present time, one can enter 5-year swaps that exchange LIBOR for 5%. An off-market swap would then be defined as a swap of LIBOR for a fixed rate other than 5%. For example, a firm with 11% coupon debt outstanding might like to convert to synthetic floating-rate debt by entering a swap in which it pays LIBOR and receives a fixed rate of 11%. What up-front payment will be required to induce a counterparty to take the other side of this swap? Assume notional principal is $95 million. (Do not round intermediate calculations. Round your final answer to the nearest dollar amount.)arrow_forward
- Please do not copy and paste what has been already posted. Show full working. Company A can borrow money at a fixed rate of 9 percent or a variable rateset at prime plus 1 percent. Company B can borrow money at a variable rateof prime plus 2 percent or a fixed rate of 8.25 percent. Company A prefersa fixed rate and company B prefers a variable rate. A swap dealer can bringthem together for a commission of 1% on the swap deal.b) Show a swapping arrangement, ensuring that both Company A and B arebetter off and the swap dealer gets the 1% cut.arrow_forwardPlease do not copy and paste what has been already posted. Show full working. Company A can borrow money at a fixed rate of 9 percent or a variable rateset at prime plus 1 percent. Company B can borrow money at a variable rateof prime plus 2 percent or a fixed rate of 8.25 percent. Company A prefersa fixed rate and company B prefers a variable rate. A swap dealer can bringthem together for a commission of 1% on the swap deal.a) Compute the potential gain for the concerned parties through the swapdeal?b) Show a swapping arrangement, ensuring that both Company A and B arebetter off and the swap dealer gets the 1% cut.arrow_forwardPlease do not copy and paste what has already been posted and all working. Company A can borrow money at a fixed rate of 9 percent or a variable rate set at prime plus 1 percent. Company B can borrow money at a variable rate of prime plus 2 percent or a fixed rate of 8.25 percent. Company A prefers a fixed rate and company B prefers a variable rate. A swap dealer can bring them together for a commission of 1% on the swap deal. a) Compute the potential gain for the concerned parties through the swap deal?arrow_forward
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