Question

At time t, company A borrows 128 million yen at an interest rate of 1.2% p.a., paid semiannually, for a period of 2 years. It then enters into a 2-year swap at an exchange rate of JPY/USD 128. The swap rates are 6-month USD LIBOR, and 1.3% p.a. compounded semiannually in yen.

What are the payments on the loan, on the swap and on the combination of them? Assume that 6-month LIBOR (annualized) evolves as follows:

t + 6 /5.4%

t + 12 /5.3%

t + 18 /5.9%

t + 24 /5.8%

Use the following table to provide your answer (use +/- to indicate the direction of the CF):

Loan /Swap /Combination

t

t + 6

t + 12

t + 18

t + 24

Answer 1

ANSWER:-

At time t, company A borrows 128 million yen at an interest rate of 1.2 % p.a , paid semiannually, for a period of 2 Years. It then enters into a 2-year swap at an exchange rate of JPY/USD 128. The swap rates are 6-month USD LIBOR, and 1.3% p.a. compounded semiannually in yen.

Semi annual reports , Payments & net are:

Period	LIBOR	Y/$	Receipt	Payment	Net	Allin dollar - payment
t	5.7%	128				$-100,000,000
t + 6	5.4%	132	$360,303	$2,700,000	$2,069,677	$-2,651,515
t +12	5.3%	137	$607,299	$2,650,000	$2,042,701	$-2,603,285
t + 18	5.9%	131	$635,115	$2,950,000	$2,314,885	$-2,901,145
t + 24	5.8%	123	$676,423	2,900,000	$2,223,577	$102,847,967

IRR = 2.75% (Semi annual)

At t: No Payment

Semi annual Payment = $ 100,000,000 * LIBOR/2

Receipt = 12,800,000,000 * 0.013/2 * 1/Spet ratio (Y/$)

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