Given the following information: Borrower AAA BBB Fixed rate Floating rate 8.50% p.a. LIBOR 9.20% p.a. LIBOR + 0.50% p.a. The notional principal of the swap agreement is USD 1 million. 1. Explain the concept of notional principal. 2. Under the assumption of no intermediation/no intermediation fees and an equal split of savings (if any), determine whether a profitable interest rate swap could be arranged between AAA Limited and BBB Limited. Explain your reasoning. 3. If a profitable swap is possible, construct a swap that would advantage both parties. Indicate which party should borrow at a fixed rate using a bond issue and which party should borrow at a floating rate via a bank loan.
Given the following information: Borrower AAA BBB Fixed rate Floating rate 8.50% p.a. LIBOR 9.20% p.a. LIBOR + 0.50% p.a. The notional principal of the swap agreement is USD 1 million. 1. Explain the concept of notional principal. 2. Under the assumption of no intermediation/no intermediation fees and an equal split of savings (if any), determine whether a profitable interest rate swap could be arranged between AAA Limited and BBB Limited. Explain your reasoning. 3. If a profitable swap is possible, construct a swap that would advantage both parties. Indicate which party should borrow at a fixed rate using a bond issue and which party should borrow at a floating rate via a bank loan.
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
Related questions
Question
Solution all.part ,,????
Transcribed Image Text:A.
Given the following information:
Borrower
Fixed rate
Floating rate
AAA
8.50% p.a.
LIBOR
BBB
9.20% p.a.
LIBOR +0.50% p.a.
The notional principal of the swap agreement is USD 1million.
1. Explain the concept of notional principal.
2. Under the assumption of no intermediation/no intermediation fees and an equal split of savings (if any), determine
whether a profitable interest rate swap could be arranged between AAA Limited and BBB Limited. Explain your reasoning.
3. If a profitable swap is possible, construct a swap that would advantage both parties. Indicate which party should borrow
at a fixed rate using a bond issue and which party should borrow at a floating rate via a bank loan.
4. Discuss whether the two parties have to share any savings equally and what is the impact of considering the presence of
an investment bank intermediating this contract on their costs.
5. Under the assumption that the swap is intermediated by an investment bank that requests a 0.10% fee to each of the two
parties, determine if a swap can produce cost savings and, if that is true, redesign the swap with these new data.
Expert Solution
This question has been solved!
Explore an expertly crafted, step-by-step solution for a thorough understanding of key concepts.
Step by step
Solved in 5 steps with 3 images
Knowledge Booster
Learn more about
Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, finance and related others by exploring similar questions and additional content below.Recommended textbooks for you
Essentials Of Investments
Finance
ISBN:
9781260013924
Author:
Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:
Mcgraw-hill Education,
Essentials Of Investments
Finance
ISBN:
9781260013924
Author:
Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:
Mcgraw-hill Education,
Foundations Of Finance
Finance
ISBN:
9780134897264
Author:
KEOWN, Arthur J., Martin, John D., PETTY, J. William
Publisher:
Pearson,
Fundamentals of Financial Management (MindTap Cou…
Finance
ISBN:
9781337395250
Author:
Eugene F. Brigham, Joel F. Houston
Publisher:
Cengage Learning
Corporate Finance (The Mcgraw-hill/Irwin Series i…
Finance
ISBN:
9780077861759
Author:
Stephen A. Ross Franco Modigliani Professor of Financial Economics Professor, Randolph W Westerfield Robert R. Dockson Deans Chair in Bus. Admin., Jeffrey Jaffe, Bradford D Jordan Professor
Publisher:
McGraw-Hill Education