Company A, a British manufacturer, wishes to borrow U.S. dollars at a fixed rate of interest. Company B, a U.S. multinational, wishes to borrow sterling at a fixed rate of interest. They were quoted the following rates per annum (adjusted for differential tax effects): Sterling US Dollars Company A 8.6% 7.65% Company B 7.8% 6.2% Design a swap that will net a bank, acting as intermediary, 15 basis points per annum and that will produce a gain of 25 basis points per annum for each of the two companies. Explain your answer in words and show the computations, and depict the swap rates in a flow chart
Company A, a British manufacturer, wishes to borrow U.S. dollars at a fixed rate of interest. Company B, a U.S. multinational, wishes to borrow sterling at a fixed rate of interest. They were quoted the following rates per annum (adjusted for differential tax effects): Sterling US Dollars Company A 8.6% 7.65% Company B 7.8% 6.2% Design a swap that will net a bank, acting as intermediary, 15 basis points per annum and that will produce a gain of 25 basis points per annum for each of the two companies. Explain your answer in words and show the computations, and depict the swap rates in a flow chart
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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Company A, a British manufacturer, wishes to borrow U.S. dollars at a fixed rate of interest. Company B, a U.S. multinational, wishes to borrow sterling at a fixed rate of interest. They were quoted the following rates per annum (adjusted for differential tax effects): Sterling US Dollars Company A 8.6% 7.65% Company B 7.8% 6.2% Design a swap that will net a bank, acting as intermediary, 15 basis points per annum and that will produce a gain of 25 basis points per annum for each of the two companies. Explain your answer in words and show the computations, and depict the swap rates in a flow chart
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