Solutions to end of Chapter Problems Part 2
Fin 4910/6990
Further Questions
Problem 7.19
(a) Company A has been offered the rates shown in Table 7.3. It can borrow for three years at 6.45%. What floating rate can it swap this fixed rate into?
(b) Company B has been offered the rates shown in Table 7.3. It can borrow for 5 years at LIBOR plus 75 basis points. What fixed rate can it swap this floating rate into?
(a) Company A can pay LIBOR and receive 6.21% for three years. It can therefore exchange a loan at 6.45% into a loan at LIBOR plus 0.24% or LIBOR plus 24 basis points
(b) Company B can receive LIBOR and pay 6.51% for five years. It can therefore exchange a loan at LIBOR plus 0.75% for a loan at 7.26%.
Problem 7.21.
The one-year LIBOR rate is 10% with annual compounding. A bank trades swaps where a fixed rate of interest is exchanged for 12-month LIBOR with payments being exchanged annually. Two- and three-year swap rates (expressed with annual compounding) are 11% and 12% per annum. Estimate the two- and three-year LIBOR zero rates.
The two-year swap rate implies that a two-year LIBOR bond with a coupon of 11% sells for par. If is the two-year zero rate
so that . The three-year swap rate implies that a three-year LIBOR bond with a coupon of 12% sells for par. If is the three-year zero rate
so that . The two- and three-year rates are therefore 11.05% and 12.17% with annual compounding.
Problem 7.22.
Company A, a British manufacturer, wishes to borrow U.S. dollars at a fixed rate of interest. Company B, a US multinational, wishes to borrow sterling at a fixed rate of interest. They have been quoted the following rates per annum (adjusted for differential tax effects):
Sterling
US Dollars
Company A
11.0%
7.0%
Company B
10.6%
6.2%
Design a swap that will net a bank, acting as intermediary, 10 basis points per annum and that will produce a gain of 15 basis points per annum for each of the two companies.
The spread between the interest rates offered to A and B is 0.4% (or 40 basis points) on
Further Questions
Problem 7.19
(a) Company A has been offered the rates shown in Table 7.3. It can borrow for three years at 6.45%. What floating rate can it swap this fixed rate into?
(b) Company B has been offered the rates shown in Table 7.3. It can borrow for 5 years at LIBOR plus 75 basis points. What fixed rate can it swap this floating rate into?
(a) Company A can pay LIBOR and receive 6.21% for three years. It can therefore exchange a loan at 6.45% into a loan at LIBOR plus 0.24% or LIBOR plus 24 basis points
(b) Company B can receive LIBOR and pay 6.51% for five years. It can therefore exchange a loan at LIBOR plus 0.75% for a loan at 7.26%.
Problem 7.21.
The one-year LIBOR rate is 10% with annual compounding. A bank trades swaps where a fixed rate of interest is exchanged for 12-month LIBOR with payments being exchanged annually. Two- and three-year swap rates (expressed with annual compounding) are 11% and 12% per annum. Estimate the two- and three-year LIBOR zero rates.
The two-year swap rate implies that a two-year LIBOR bond with a coupon of 11% sells for par. If is the two-year zero rate
so that . The three-year swap rate implies that a three-year LIBOR bond with a coupon of 12% sells for par. If is the three-year zero rate
so that . The two- and three-year rates are therefore 11.05% and 12.17% with annual compounding.
Problem 7.22.
Company A, a British manufacturer, wishes to borrow U.S. dollars at a fixed rate of interest. Company B, a US multinational, wishes to borrow sterling at a fixed rate of interest. They have been quoted the following rates per annum (adjusted for differential tax effects):
Sterling
US Dollars
Company A
11.0%
7.0%
Company B
10.6%
6.2%
Design a swap that will net a bank, acting as intermediary, 10 basis points per annum and that will produce a gain of 15 basis points per annum for each of the two companies.
The spread between the interest rates offered to A and B is 0.4% (or 40 basis points) on