A corporation has issued a $13 million issue of floating-rate bonds on which it pays an interest rate 0.5% over theSOFR rate. The bonds are selling at par value. The firm is worried that rates are about to rise, and it would like tolock in a fixed interest rate on its borrowings. Dealers in the swap market are offering swaps of SOFR for 8%. Aswap position converts the firm's borrowings to a synthetic fixed-rate loan. What interest rate will it pay on thatsynthetic fixed-rate loan?

Explanation of Synthetic Fixed-Rate LoanA synthetic fixed-rate loan is created when a borrower with…

Answered: A corporation has issued a $13 million…

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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Sambuka, Inc. can issue annual coupon bonds in either U.S. dollars or in Euros that mature in threeyears. Dollar-denominated bonds would have a coupon rate of 5 percent; Euro-denominated bonds would have a coupon rate of 4 percent. Assuming that Sambuka can issue bonds worth $10,000,000 in US dollars or 8 million Euros, given that the current exchange rate is $1.25/1 Euro. If the forecasted exchange rate for the Euro is $1.21for each of the next three years what is the annual cost of financing for the Euro-denominated bonds? Which type of bond should Sambuka issue?
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The Philippines BOT is issuing a Retail Treasury Bond. The bond is now trading at Php52 per Php100 par value. A put or call option on the bond with an exercise price of Php53.5 per Php100 might be sold by an over-the-counter options dealer. It's possible that you'll have to choose between European and American options. Assume the contract covers Php10 million in bond face value and is cash settled. What is the value of the short call to pay the long call if the long call exercises his right at the Php55 bond price? How much would the buyer pay for the Php10 million face value bond if it was deliverable? Interpret the result. (Show complete solution.)
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