Company X wants to borrow $10,000,000 floating for 5 years; Company Y wants to borrow £5,000,000 fixed for 5 years. The exchange rate is $2 = £1. Their external borrowing opportunities are: Company X S Borrowing Cost S Company Y S 10 12 £Borrowing Cost % % £ 10.5 % £ 13 % A swap bank proposes the following swap: Company X will pay the swap bank annual payments on $10,000,000 at an interest rate of $9.80 percent; in exchange the swap bank will pay to company X interest payments on £5,000,000 at a fixed rate of £10.5 percent. Y will pay the swap bank interest payments on £5,000,000 at a fixed rate of £12.80 percent and the swap bank will pay Y annual payments on $10,000,000 with the coupon rate of $12 percent. Principal amounts will be exchanged and re-exchanged, respectively, at inception and maturity. If company X takes on the swap, what external action should it engage in? the answer is one of the following: It should borrow £5,000,000 at £12.80 percent for five years; translate pounds to dollars at the spot rate. It should borrow £5,000,000 at £10.50 percent for five years; translate pounds to dollars at the spot rate. It should borrow $10,000,000 at $12 percent. It should borrow $10,000,000 at $10 percent.
Company X wants to borrow $10,000,000 floating for 5 years; Company Y wants to borrow £5,000,000 fixed for 5 years. The exchange rate is $2 = £1. Their external borrowing opportunities are: Company X S Borrowing Cost S Company Y S 10 12 £Borrowing Cost % % £ 10.5 % £ 13 % A swap bank proposes the following swap: Company X will pay the swap bank annual payments on $10,000,000 at an interest rate of $9.80 percent; in exchange the swap bank will pay to company X interest payments on £5,000,000 at a fixed rate of £10.5 percent. Y will pay the swap bank interest payments on £5,000,000 at a fixed rate of £12.80 percent and the swap bank will pay Y annual payments on $10,000,000 with the coupon rate of $12 percent. Principal amounts will be exchanged and re-exchanged, respectively, at inception and maturity. If company X takes on the swap, what external action should it engage in? the answer is one of the following: It should borrow £5,000,000 at £12.80 percent for five years; translate pounds to dollars at the spot rate. It should borrow £5,000,000 at £10.50 percent for five years; translate pounds to dollars at the spot rate. It should borrow $10,000,000 at $12 percent. It should borrow $10,000,000 at $10 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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Transcribed Image Text:Company X wants to borrow $10,000,000 floating for 5 years; Company Y wants to borrow £5,000,000 fixed for 5 years. The exchange rate is $2 =
£1. Their external borrowing opportunities are:
Company X
$ Borrowing
Cost
S
Company Y S
£Borrowing
12
Cost
10 %
%
£
£
10.5 %
13
%
A swap bank proposes the following swap: Company X will pay the swap bank annual payments on $10,000,000 at an interest rate of $9.80 percent;
in exchange the swap bank will pay to company X interest payments on £5,000,000 at a fixed rate of £10.5 percent. Y will pay the swap bank interest
payments on £5,000,000 at a fixed rate of £12.80 percent and the swap bank will pay Y annual payments on $10,000,000 with the coupon rate of
$12 percent. Principal amounts will be exchanged and re-exchanged, respectively, at inception and maturity. If company X takes on the swap, what
external action should it engage in?
the answer is one of the following:
It should borrow £5,000,000 at £12.80 percent for five years; translate pounds to dollars at the spot rate.
It should borrow £5,000,000 at £10.50 percent for five years; translate pounds to dollars at the spot rate.
It should borrow $10,000,000 at $12 percent.
It should borrow $10,000,000 at $10 percent.
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