Company A is an AAA-rated firm desiring to issue five-year FRNs. It finds that it can issue FRNS at six-month LIBOR + .165 percent or at hree-month LIBOR + .165 percent. Given its asset structure, three-month LIBOR is the preferred index. Company B is an A-rated firm hat also desires to issue five-year FRNs. It finds it can issue at six-month LIBOR + 1.0 percent or at three-month LIBOR + .665 percent. Given its asset structure, six-month LIBOR is the preferred index. Assume a notional principal of $15,000,000. Determine the quality spread differential (QSD). (Do not round intermediate calculations. Enter your answer as a percent rounded to 3 decimal places.) Quality spread differential percent

Company A is an AAA-rated firm desiring to issue five-year FRNs. It finds that it can issue FRNS at six-month LIBOR + .165 percent or at hree-month LIBOR + .165 percent. Given its asset structure, three-month LIBOR is the preferred index. Company B is an A-rated firm hat also desires to issue five-year FRNs. It finds it can issue at six-month LIBOR + 1.0 percent or at three-month LIBOR + .665 percent. Given its asset structure, six-month LIBOR is the preferred index. Assume a notional principal of $15,000,000. Determine the quality spread differential (QSD). (Do not round intermediate calculations. Enter your answer as a percent rounded to 3 decimal places.) Quality spread differential percent

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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Company A is an AAA-rated firm desiring to issue five-year FRNS. It finds that it can issue FRNS at six-month LIBOR + .220 percent or at three-month LIBOR + .220 percent. Given its asset structure, three-month LIBOR is the preferred index. Company B is an A-rated firm that also desires to issue five-year FRNs. It finds it can issue at six-month LIBOR +1.0 percent or at three- month LIBOR + 720 percent. Given its asset structure, six-month LIBOR is the preferred index. Assume a notional principal of $15,000,000. Determine the quality spread differential (QSD). (Do not round intermediate calculations. Enter your answer as a percent rounded to 3 decimal places.) Quality spread differential 0.500 percent 3 decimal places required.
A ) A portfolio manager desires to generate $10 million 100 days from now from a portfolio that is quite similar in composition to the S&P 100 index. She requests a quote on a short position in a 100-day forward contract based on the index with a notional amount of $I0 million and gets a quote of $25.2. If the index level at the settlement date is $35.7. calculate the amount the manager will payor receive to settle the contract B) A forward contract covering a $10 million face value of T-bills that will have 100 days to maturity at contract settlement is priced at 1.96 on a discount yield basil. Compute the dollar amount the long must pay at settlement for the T-bills. C) Consider an FRA that: • Expires/settles in 30 days. • Is based on a notional principal amount of $1 million. • Is based on 9O-dayLIBOR. • Specifics a forward rate of 5%. Assume that the annual 9O-day LIBOR 30-days from now (at expiration) is 6%. Compute the cash settlement payment at expiration and identify which…
Assuming that the investment pays no dividend and requires a storage cost of 1 percent (of current value), calculate the current (i.e., July 15th) implied spot price for a ton of the commodity and September 15th implied price for the same ton. In your calculations, assume that an annual riskfree rate of 5 percent prevails over the entire contract life.
Consider an FI with the following off-balance-sheet items: A two-year loan commitment with a face value of $120 million, a standby letter of credit with a face value of $20 million and trade-related letters of credit with a face value of $70 million. All counterparties have a credit rating of BBB. Assuming a required capital ratio of 8%, what is the capital amount the FI needs to hold against these exposures? ANSWER MUST BE 7.52 million
Companies A and B are able to receive the following rates per annum on a $10 million, 5-year investment, as a function of whether the investment returns a fixed or floating rate of interest: Fixed rate Floating rate Company A 5.0 Company B | 5.6 SOFR+20 basis points SOFR Company A requires a fixed-rate investment and company B requires a floating-rate invest- ment. Design a swap that will net a bank, acting as an intermediary, 30 basis points and will appear equally attractive to each company.
Which statements are true about an ABS CDO created from the mezzanine tranche of an ABS? Select all that apply: If the underlying assets lose 10% of their value, investors in the ABS CDO mezzanine tranche can lose at most 10% of their investment. Investors in the ABS CDO equity tranche are promised higher returns than investors who buy into the ABS CDO mezzanine tranche. ABS CDOs are created to create more AAA-rates tranches. The senior tranche of the ABS CDO is less risky than the senior tranche of the ABS.
MCB has just issued a guaranteed investment contract (GIC). MCB needs to immunize this GIC, which guarantees a single payment of USD160,000,000 in 4 years and provides a bond equivalent yield of approximately 3.50%. The investment team calculated the present value of the GIC to be USD 145,700,000. This is the amount they intend to invest today to immunize the GIC. WB is not permitted to use leverage and the current duration is 4. MCB is building a suitable portfolio and already holds the U.S. government bonds shown in Exhibit 1. Existing Portfolio Bonds Bond Market Price (USD) Total Market Value (USD) Total Dollar Duration Bond A 102.32 49,113,600 954,278 Bond B 94.9 59,630,000 4,209,878 MCB must choose a U.S. government bond to complete the immunized portfolio. The investment team has gathered the data shown in Exhibit 2. Bonds Available to Complete Immunized Portfolio Yield to Maturity 3.52% Modified Duration Market Price (USD) 99.97 Bond Bond X 1.333 Bond Y 99.36 3.89% 2.154 Bond Z…
When a firm finances the purchase of an asset with a life of five years with a short term loan of six months, its financing strategy is called a. Conservative b. Aggressive c. Moderate (maturity matching) d. Optimizing Capital Structure e. Off Balance Sheet Financing
Consider an FI with the following off-balance-sheet items: A two-year loan commitment with a face value of $120 million, a standby letter of credit with a face value of $20 million and trade-related letters of credit with a face value of $70 million. All counterparties have a credit rating of BBB. What is the total capital amount the FI needs to hold against these exposures? (Assume data obtained from 2020 FI records) Select one: A. $5.04 million B. $9.87 million C. $8.4 million D. $7.52 million
Suppose that Mr. Dubinski has obtained from Blaine’s banker the quotes (the one in the template, ignore the one provided in the case) for default spreads over 10-year Treasury bonds. What do these quotes imply about BKI’s cost of debt at the various debt levels and credit ratings? Compute BKI’s weighted average cost of capital at each of the indicated debt levels. What do your calculations imply about Blaine’s optimal capital structure?
Suppose that over the next year, one of three things could happen to a company's credit rating. It could remain investment grade, drop to non-investment grade or default. The value of a credit derivative that pays $100 in 1-year if the company's credit rating remain investment grade is $93. The value of a credit derivative that pays $200 in 1-year if the company's credit rating drops to non-investment grade is $7. The value of a credit derivative that pays $300 in 1-year if the company defaults is $6. Calculate the risk-free rate and the risk-neutral probability of default. (answers to 4 decimal places)
Which of the following factors is/are included in Fama and French’s (2015, “A five-factor asset pricing model”, Journal of Finance) five-factor asset pricing model? RMW: the average return for firms with the highest 30% operating profitabilities minus the average return for firms with the lowest 30% operating profitabilities WML: the average return for firms with the highest 30% 11-month returns lagged one month minus the average return for firms with the lowest 30% 11‑month returns lagged one month DEF: the difference between the average yield of bonds rated BAA by Moodys and the average yield of bonds rated AAA by Moodys (a) & (b) (b) & (c)

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