PRIN.OF CORPORATE FINANCE
13th Edition
ISBN: 9781260013900
Author: BREALEY
Publisher: RENT MCG
expand_more
expand_more
format_list_bulleted
Concept explainers
Question
Chapter 26, Problem 19PS
a.
Summary Introduction
To discuss: Whether the swap shows profit or loss to the bank.
b.
Summary Introduction
To discuss: The amount charge by the bank to terminate the company A.
Expert Solution & Answer
Want to see the full answer?
Check out a sample textbook solution
Students have asked these similar questions
Economics
Some time ago a swap dealer entered into a Forward Rate Agreement (FRA) that has a notional value
of $25,000,000. The swap dealer agreed to pay 4.96% based on quarterly compounding and receive
Libor. Libor zero rates (based on continuous compounding are given below.
a. What is the value of the FRA to the swap dealer assuming it begins in 9 months and lasts for 3
months?
b. Provide an example which shows exactly how the swap dealer can hedge its position in the FRA.
Zero Rate (%)
Maturity
(months)
3
4
6.
4.5
12
5.5
15
6
A bank is considering using a “three against six” $2,000,000 FRA to cover its potential loss. The purpose of the FRA is to cover the interest rate risk caused by the maturity mismatch from having made a six-month Eurodollar loan and having accepted a three-month Eurodollar deposit. The agreement rate with the buyer is 4.6%. There are actually 92 days in the three-month FRA period. Assume 360 days a year, which one of the following statements is incorrect?
Group of answer choices
To hedge the risk caused by maturity mismatch, the bank could take the buyer’s position if it uses the Euro-Dollar Interest Rate Futures instead.
If the settlement rate is 4.8% three months from today, then the buyer pays the seller.
If the settlement rate is 4.8% three months from today, then the FRA is worth $1009.84
To hedge the loss caused by maturity mismatch, the bank should be a seller of the FRA.
Without the FRA, the bank will lose if the market interest rate…
5.
Suppose you have a 2.5-year remaining on an interest rate swap with a notional
principal of $10,000, 000 between Company A and Company B. Company A pays fixed rate
and Company B pays the float rate. Fixed and float payments are exchanged every year and
the last payment was exchanged 6 months ago. The fixed rate is 3.5% per annum, and the
floating rate is tied to the annual LIBOR. The previous 1-year LIBOR rate, set 6 months ago,
is 2.75%, 6 month LIBOR is 3.25%. the 1.5-year LIBOR is 3.25%, and the 2.5-year LIBOR is
3.50%.
Calculate the present value of the fixed and floating legs of the swap, and determine the swap's
net present value from Company A's perspective. Assume annual compounding for discounting.
Chapter 26 Solutions
PRIN.OF CORPORATE FINANCE
Ch. 26 - Vocabulary check Define the following terms: a....Ch. 26 - Prob. 2PSCh. 26 - Catastrophe bonds On some catastrophe bonds,...Ch. 26 - Futures and options A gold-mining firm is...Ch. 26 - Prob. 5PSCh. 26 - Prob. 6PSCh. 26 - Futures contracts List some of the commodity...Ch. 26 - Prob. 8PSCh. 26 - Futures prices Calculate the value of a six-month...Ch. 26 - Futures prices In December 2017, six-month futures...
Ch. 26 - Prob. 11PSCh. 26 - Prob. 13PSCh. 26 - Prob. 15PSCh. 26 - Prob. 16PSCh. 26 - Prob. 17PSCh. 26 - Convenience yield In March 2018, six-month bitcoin...Ch. 26 - Prob. 19PSCh. 26 - Prob. 20PSCh. 26 - Total return swaps Is a total return swap on a...Ch. 26 - Prob. 22PSCh. 26 - Prob. 23PSCh. 26 - Hedging What is meant by delta () in the context...Ch. 26 - Hedging You own a 1 million portfolio of aerospace...Ch. 26 - Prob. 26PSCh. 26 - Prob. 27PSCh. 26 - Prob. 28PSCh. 26 - Hedging Price changes of two gold-mining stocks...Ch. 26 - Prob. 30PSCh. 26 - Prob. 31PSCh. 26 - Prob. 32PSCh. 26 - Prob. 33PSCh. 26 - You are a vice president of Rensselaer Advisers...
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.Similar questions
- Give typing answer with explanation and conclusion A bank sells a “three against six” $5,000,000 FRA for a three-month period beginning three months from today and ending six months from today. The purpose of the FRA is to cover the interest rate risk caused by the maturity mismatch from having made a three-month Eurodollar loan and having accepted a six-month Eurodollar deposit. The agreement rate with the buyer is 5.41 percent. There are actually 92 days in the three-month FRA period. Assume that three months from today the settlement rate is 4.92 percent. Determine how much the FRA is worth. (report postive amount, with cents)arrow_forwardAn interest rate swap has three years of remaining life. Payments are exchanged annually. Interest at 5% is paid and 12-month LIBOR is received. An exchange of payments has just taken place. The one-year, two-year and three-year LIBOR/swap zero rates are 4%, 5% and 6%. All rates are annually compounded. What is the value of the swap as a percentage of the principal ($100) when OIS and LIBOR rates are the same? (arrow_forwardA customer asks a bank if it would be willing to commit to making the customer a one-year loan at an interest rate of 6.5% two years from now. To compensate for the costs of making the loan, the bank needs to charge two percentage points more than the expected interest rate on a Treasury bond with the same maturity if it is to make a profit. The bank estimates the liquidity (term) premium for one-, two-, and three-year bond to be 0%, 0.5%, and 1%, respectively. According to the Treasury yield curve below, what interest rate the loan must charge in order for the bank to make a profit on the loan? Should the manager be willing to make the commitment? Choose the closest answer below. Spot rate 6% 5% 4% Term 1-year 2-year 3-year O 7%; Yes O 8%; No O 5%: Yes O 6%; Yes O 7%; Noarrow_forward
- 6. Consider a credit default swap initiated on April 1, 2012. The notional principal amount is $100 million. The premium payments are made annually at a rate of 180 basis points per year. The swap will last for 5 years. Suppose that default event occurs on December 31, 2014. The recovery rate is 65%. Then the accrual payment is equal to ___________. a. $0b. $1,200,000c. $1,350,000d. $4,400,000e. $35,000,000arrow_forwardGive typing answer with explanation and conclusion You entered into a plain vanilla swap a while back where you pay 10% per annum with quarterly compounding on a notional principal of $100,000,000 with payments made quarterly. In exchange, you receive a payment of LIBOR. Your swap has 0.7 years left until its termination date. The LIBOR rate was 14.5% per annum with quarterly compounding when you made your last payment. If today’s discount rates are per annum with continuous compounding as followed what is the value of your position? Years Rate 0.2 7.25% 0.45 7.30% 0.7 7.35%arrow_forwardA bank made a 6-month $50 million loan at 5% funded by a one-year wholesale deposit at 4%. To protect against interest rate changes when rolling over the loan in 6 months, the bank decides to hedge using a forward rate agreement (FRA). 1. Explain how you would hedge using FRAs to maintain the current spread. 2. Show the net spread in dollars if interest rates are 3%, 5% and 7% at maturity. Use 184 days for 6-month FRAs.arrow_forward
- (FRA)A bank is considering using a "three against six" $2,000,000 FRA to cover its potential loss. The purpose of the FRA is to cover the interest rate risk caused by the maturity mismatch from having made a six-month Eurodollar loan and having accepted a three-month Eurodollar deposit. The agreement rate with the buyer is 5.025%. There are actually 92 days in the three-month FRA period. If the settlement rate is 4.375% three months from today, then the FRA is worth $__________________ (Assume 360 days a year and keep two decimal places.)arrow_forwardA promissory note is a written statement agreeing to pay a sum of money either on demand or at a definite future time. When a note is purchased for its present value at a given interest rate, the note is said to be discounted and the interest rate is called the discount rate. Suppose a $10,000 note due 7 years from now is sold to a financial institution for $5600. What is the nominal discount rate with quarterly compounding? The nominal rate is %. (Type an integer or decimal rounded to two decimal places as needed.)arrow_forward2. A company can invest funds for five years at LIBOR minus 40 basis points. The five-year swap rate is 4.5%. What fixed rate of interest can the company earn by using the swap?arrow_forward
- Six months ago, Thomas Group entered a one-year interest rate swap with its bank, paying fixed and receiving floating every quarter, according to the 3-month rate with nominal amount of $10 million. Following is the rates information when swap was entered, the rates information three months ago, and the rates information today. Note that all rates are annual and quarterly compounding. Keep at least 6 decimal points during your calculation. 3-month 6-month 9-month 12-month Six Months Ago 3.50% 3.80% 4.00% 4.00% Three Months Ago 3.80% 4.00% 4.50% 4.80% Now 4.80% 4.80% 5.00% 5.20% a. What are the amounts of money Thomas Group received or paid over past six months? b. What is the current market value of the interest rate swap Thomas Group is holding?arrow_forwardAn interest rate swap has three years of remaining life. Payments are exchanged annually. Interest at 4% is paid and 12-month LIBOR is received. A exchange of payments has just taken place. The one-year, two-year and three- year LIBOR/swap zero rates are 3%, 4% and 5%. All rates an annually compounded. What is the value of the swap if LIBOR discounting is used. O 2.58 O 5.47 2.06 O 1.06arrow_forwardThe bank issued a $200,000 30-year mortgage (monthly payments) with an annual interest rate of 9.4%, compounded monthly. They just received payment number 109 and have decided to sell the loan. The buyer of the loan expects to receive an annual rate of return equal to 8.80%, compounded monthly. For the original bank that issued the loan, what was the internal rate of return? a.9.36% b.7.03% c.9.69% d.10.42% e.8.80%arrow_forward
arrow_back_ios
SEE MORE QUESTIONS
arrow_forward_ios
Recommended textbooks for you
