Intermediate Financial Management (MindTap Course List)
13th Edition
ISBN: 9781337395083
Author: Eugene F. Brigham, Phillip R. Daves
Publisher: Cengage Learning
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Chapter 24, Problem 1P
Summary Introduction
To determine: The net payment of Zhao.
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Commercial bank A and Savings bank B entered into a swap contract. The swap has a notional principal amount of $200 million and calls for Commercial Bank A to make annual floating interest rate payment of LIBOR minus 0.75% to Savings Bank B. In return, Savings Bank B pays fixed 8% interest rate to Commercial Bank A. If LIBOR is 8%, what is the net payment?
Morton Company obtains a one-year loan of 3,000,000 Japanese yen at an interest rate of 7%. At the time the loan is extended, the spot rate of the yen is $.006. If the spot rate of the yen at maturity of the loan is $.0037, what is the effective financing rate of borrowing yen? Show the calculation
Answer
Company A and B has been offered the following rates per annum on a £10 million 5 - year
loan.
Company
A
Fixed (%)
Floating (%)
LIBOR + 1.2
B
LIBOR + 0.3
Company A requires a floating rate loan, whereas company B requires a fixed rate loan. In
which market does company A have a comparative advantage? Design a swap that will give
a bank, acting as an intermediary 0.5% p.a. and that will appear equally attractive to both
companies. Explain how to achieve this, using diagrams and text.
Chapter 24 Solutions
Intermediate Financial Management (MindTap Course List)
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