Question

28. Your firm can borrow at a fixed rate of 8% or a floating of LIBOR+1%. You can also enter into a fixed-for-LIBOR swap where the fixed rate (R%) is 7.7% in the exchange of LIBOR. Suppose that you borrow at a fixed rate of 8% and then enter into the swap. What is the net effect of the swap?

- You can convert the fixed rate to a floating rate of LIBOR+0.3%
- You can convert the fixed rate to a floating rate of LIBOR+0.5%
- You can convert the floating rate to a fixed rate of 7.5%
- You can convert the floating rate to a fixed rate of 8.5%

Answer #1

Correct Answer is OPTION A

NOTE : Thus firm will be able to borrow at LIBOR + 0.3% by entering into a swap, as compared to LIBOR + 1% that it could have borrowed directly

therefore by entering into the swap firm has saved 0.7%

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%

Carter Enterprises can issue floating-rate debt at LIBOR + 3% or
fixed-rate debt at 9%. Brence Manufacturing can issue floating-rate
debt at LIBOR + 2.9% or fixed-rate debt at 12%. Suppose Carter
issues floating-rate debt and Brence issues fixed-rate debt. They
are considering a swap in which Carter makes a fixed-rate payment
of 7.90% to Brence and Brence makes a payment of LIBOR to Carter.
What are the net payments of Carter and Brence if they engage in
the swap?...

Carter Enterprises can
issue floating-rate debt at LIBOR + 3% or fixed-rate debt at 9%.
Brence Manufacturing can issue floating-rate debt at LIBOR + 2.5%
or fixed-rate debt at 12%. Suppose Carter issues floating-rate debt
and Brence issues fixed-rate debt. They are considering a swap in
which Carter makes a fixed-rate payment of 7.60% to Brence and
Brence makes a payment of LIBOR to Carter. What are the net
payments of Carter and Brence if they engage in the swap?...

1. Suppose Google would like to borrow fixed-rate yen and can
borrow them at 4.00% or floating-rate dollars at LIBOR + 0.10%. The
Panasonic Corporation would like to borrow floating-rate dollars
and can borrow fixed-rate yen at 4.5% or floating-rate dollars at
LIBOR + 0.80%. What is the range of possible cost savings that
Google can realize through an interest rate/currency swap with
Panasonic?

Question (1)
Firm “A” prefers to borrow float-rate while firm “B” prefers to
borrow fixed-rate. “A” is offered 4.5% fixed rate and LIBOR float
rate, while “B” is offered 6% fixed rate and LIBOR+0.5% float rate.
If both firms approach you as an MSF elite graduate for a
consultation to reduce their borrowing costs, suggest (voluntarily)
an interest rate swap structure where “A” benefits 75% of the cost
reduction and “B” benefits 25% of the cost reduction.
A
B
Issue...

Two firms X and Y are able to borrow funds as follows:
Firm A: Fixed-rate funding at 3.5% and floating rate at
Libor-1%.
Firm B: Fixed-rate funding at 4.5% and floating rate at
Libor+2%.
Assume A prefers fixed rate and B prefers floating rate. Show
how these two firms can both obtain cheaper financing using a swap.
What swap strategy would you suggest to the two firms if you were
an unbiased advisor? What is the net cost to each...

Suppose that at the present time, one can enter 5-year swaps
that exchange LIBOR for 5%. An off-market swap would then
be defined as a swap of LIBOR for a fixed rate other than 5%. For
example, a firm with 7% coupon debt outstanding might like to
convert to synthetic floating-rate debt by entering a swap in which
it pays LIBOR and receives a fixed rate of 7%. What up-front
payment will be required to induce a counterparty to take...

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

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