Ashton Bishop is the debt manager for World Telephone, which needs €3.45 billion Euro financing for its operations. Bishop is considering the choice between issuance of debt denominated in: • Euros (€), or ⚫ U.S. dollars, accompanied by a combined interest rate and currency swap. Bishop believes that issuing the U.S.-dollar debt and entering into the swap can lower World's cost of debt by 45 basis points. Immediately after selling the debt issue, World would swap the U.S. dollar payments for Euro payments throughout the maturity of the debt. She assumes a constant currency exchange rate throughout the tenor of the swap. Characteristic Par value Term to maturity Fixed interest rate Interest payment Spot currency exchange rate 3-year tenor euro/U.S. dollar fixed interest rates U.S. Dollar Currency Euro Currency Debt Debt €3.45 billion 3 years 6.25% Annual $3 billion 3 years 7.75% Annual $1.02 per euro ($1.02/€1.00) 5.92% euro/7.42% U.S. dollar Required: b. Enter the notional principal and interest payment cash flows of the combined interest rate and currency swap. Note: Round the final answers to two decimal places. Cash Flows of the Swap Year 0 Year 1 Year 2 Year 3 World pays Notional principal Interest payment billion million million billion billion million million million World receives Notional principal billion million million billion Interest payment billion million million million
Ashton Bishop is the debt manager for World Telephone, which needs €3.45 billion Euro financing for its operations. Bishop is considering the choice between issuance of debt denominated in: • Euros (€), or ⚫ U.S. dollars, accompanied by a combined interest rate and currency swap. Bishop believes that issuing the U.S.-dollar debt and entering into the swap can lower World's cost of debt by 45 basis points. Immediately after selling the debt issue, World would swap the U.S. dollar payments for Euro payments throughout the maturity of the debt. She assumes a constant currency exchange rate throughout the tenor of the swap. Characteristic Par value Term to maturity Fixed interest rate Interest payment Spot currency exchange rate 3-year tenor euro/U.S. dollar fixed interest rates U.S. Dollar Currency Euro Currency Debt Debt €3.45 billion 3 years 6.25% Annual $3 billion 3 years 7.75% Annual $1.02 per euro ($1.02/€1.00) 5.92% euro/7.42% U.S. dollar Required: b. Enter the notional principal and interest payment cash flows of the combined interest rate and currency swap. Note: Round the final answers to two decimal places. Cash Flows of the Swap Year 0 Year 1 Year 2 Year 3 World pays Notional principal Interest payment billion million million billion billion million million million World receives Notional principal billion million million billion Interest payment billion million million 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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Transcribed Image Text:Ashton Bishop is the debt manager for World Telephone, which needs €3.45 billion Euro financing for its operations. Bishop is
considering the choice between issuance of debt denominated in:
• Euros (€), or
⚫ U.S. dollars, accompanied by a combined interest rate and currency swap.
Bishop believes that issuing the U.S.-dollar debt and entering into the swap can lower World's cost of debt by 45 basis points.
Immediately after selling the debt issue, World would swap the U.S. dollar payments for Euro payments throughout the maturity of the
debt. She assumes a constant currency exchange rate throughout the tenor of the swap.
Characteristic
Euro Currency Debt
€3.45 billion
3 years
6.25%
Annual
Par value
Term to maturity
Fixed interest rate
Interest payment
Spot currency exchange rate
3-year tenor euro/U.S. dollar
fixed interest rates
$1.02 per euro ($1.02/€1.00)
5.92% euro/7.42% U.S. dollar
U.S. Dollar Currency
Debt
$3 billion
3 years
7.75%
Annual
Required:
b. Enter the notional principal and interest payment cash flows of the combined interest rate and currency swap.
Note: Round the final answers to two decimal places.
Cash Flows of the Swap
Year 0
Year 1
Year 2
Year 3
World pays
Notional principal
Interest payment
billion
million
million
billion
billion
million
million
million
World receives
Notional principal
billion
million
million
billion
Interest payment
billion
million
million
million
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