Question

Company A, a lower-rated firm, desires a fixed-rate loan. Company A presently has access to floating interest rate funds at a margin of 1.7% over LIBOR. In contrast, company B, a higher-rated firm, prefers a floating-rate loan. Company B has access to fixed-rate funds at 11% and floating-rate funds at LIBOR+0.7%. Both companies enter into an interest rate swap with Bank C. Based on the swap, Bank C would gain 0.4% and each of the two companies would gain 0.6%. What is the current fixed rate available for Company A?

Please provide detailed explanation

Answer #1

Since company B prefers a floating rate loan, they would take it from company A and similarly company A, since they want a fixed-rate loan, will take it from company B. Now, the total benefit, in this case, will be the benefit obtained by each firm plus the benefit obtained by the bank. Hence, total benefit = 0.6 + 0.6 + 0.4 = 1.6%. Now, since company A is using its floating rate = Libor + 1.7% and company B is using its fixed-rate = 11%, the total cost will be = Libor + 12.7%. The cost of the reverse option where A takes a fixed-rate loan (let it be at A%) and B takes a floating rate = Libor + 0.7%, the total cost will be = Libor + 0.7 + A. This cost should be more than the current cost by 1.6%. Hence, we have:

Libor + 0.7 + A = Libor + 12.7 + 1.6

Hence, A = 13.6%.

Hence, 13.6% will be the fixed rate available for company A.

Press F, a BBB-rated firm, desires a fixed rate, long-term loan.
Press F presently has access to floating interest rate funds at a
margin of 1.42% p.a. over LIBOR. Its direct borrowing cost is
10.47% p.a. in the fixed rate bond market. In contrast, B.D.
Energy, which prefers a floating rate loan, has access to fixed
rate funds in the Eurodollar bond market at 7.20% p.a. and floating
rate funds at LIBOR + 0.29% p.a. Suppose they enter into an...

Question 6
Suppose firm ABC has access to fixed rate 7.5%, and floating
rate of Euribor + 1.5%, while XYZ had access to fixed rate 7% and
floating rate Euribor + 0.5%. For these two firms:
For these two firms, if a swap would work, and if we ignore the cut
to a swap dealer, the total amount both firms
combined could gain is:
0.5%
1.0%
1.5%
It can vary depending on how they split

company B requires a fixed rate loan. Design a swap that will
net a bank, acting as intermediary, 0.2% per annum and that will
appear equally attractive to both companies. Companies A and B have
been offered the following rates per annum on a $10 million
five-year loan:
Fixed Rate
Floating Rate
Company A
5.25%
LIBOR + 0.35%
Company B
6.85%
LIBOR + 1.0%
Company A requires a floating rate
loan;

21. Firm AAA can borrow at 6% fixed or in the floating-rate
market at LIBOR flat. BBB can borrow at 7.5% fixed or at
LIBOR+0.5%. AAA wants to borrow floating and BBB fixed, so that
they are interested in entering into an interest-rate swap. What is
the swap fixed rate that is equally attractive to both firms?
Assume that there is no financial intermediary involved in the swap
transaction.
A) 7% B) 6.5% C) 6% D) 5.5%

Firm AAA can borrow at 5% fixed or in the floating-rate
market at LIBOR+0.5%. BBB can borrow at 7% fixed or at LIBOR+0.5%.
AAA wants to borrow floating and BBB fixed, so that they are
interested in entering into an interest-rate swap. What is the swap
fixed rate that is equally attractive to both firms? Assume that
there is no financial intermediary involved in the swap
transaction.
A)
7%
B)
6.5%
C)
6%
D) 5.5%

Firm AAA can borrow at 5% fixed or in the floating-rate market
at LIBOR+0.5%. BBB can borrow at 7% fixed or at LIBOR+0.5%. AAA
wants to borrow floating and BBB fixed, so that they are interested
in entering into an interest-rate swap. What is the swap fixed rate
that is equally attractive to both firms? Assume that there is no
financial intermediary involved in the swap transaction.
A)
7%
B)
6.5%
C)
6%
D) 5.5%

Consider this scenario: An American company would like to barrow
fixed-rate yen. They can barrow fixed-rate yen at 5.4% or
floating-rate dollars at LIBOR + 1.24%. There is also an Asian
company who would like to borrow floating-rate dollars. They can
borrow fixed-rate yen at 5.8% or floating-rate dollars at LIBOR +
1.7%. What is the total cost savings which can be realized through
an interest rate/currency swap between the two?

Companies AAA and BBB are offered the following rates per annum
on a $5 million 10-year loan. AAA requires a
floating-rate loan while BBB requires a fixed-rate loan. Bank of
America (BOA) is planning to arrange a fixed-for-LIBOR (= R% &
LIBOR exchange) swap with a 20-basis-point spread, which will
appear equally attractive to AAA and BBB.
Fixed Rate
Floating Rate
AAA
8%
LIBOR-0.5%
BBB
7%
LIBOR+0.5%
Total gain of the swap is:
The net gain of the swap to...

4) Company A has $125,000,000 of fixed interest debt
with an interest rate of 7% which
it wants to swap into floating rate
debt. Company B has floating rate debt at LIBOR plus 0.75% which it
wants to swap for fixed rate. The two companies agree to an
interest rate swap with a tenor of five years. The terms of the
agreement call for a notional principle of $125,000,000, Company A
pays Company B LIBOR plus 0.5% with a one...

A company has funded 10 percent fixed-rate assets with
variable-rate liabilities at LIBOR + 2 percent. A bank has funded
variable-rate assets with fixed-rate liabilities at 6 percent. The
bank's variable-rate assets earn LIBOR + 1 percent. The company and
the bank have reached agreement on an interest-rate swap with the
fixed-rate swap payment at 6 percent and the variable-rate swap
payment at LIBOR. Briefly discuss your results.
a. What will be the net after-swap cost of funds for the...

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