Question

- 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%

Answer #1

AAA | BBB | Calculation | Difference | ||

Fixed Rate | 5% | 7% | 7% - 5% | 2% | |

Floating Rate | LIBOR+0.5% | LIBOR+0.5% | LIBOR+0.5% - LIBOR-0.5% | 0 | |

Net Difference | 2% - 0 | 2% | |||

As nothing is given, so it is assumed that fain is splitted equally. | |||||

Gain to each Party = 2%*50% = 1% | |||||

Effective Rate of Interest | |||||

Party | Calculation | Effective Rate | |||

AAA | LIBOR+0.5%-1% | LIBOR-0.5% | |||

BBB | 7% - 1% | 6% | |||

So, Effective Swap Fixed Rate = 6% |
|||||

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%

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%

AAA and BBB both want to borrow $50 million
for five years and have been offered the following rates per
annum:
Fixed rate
floating rate
AAA
6.5%
LIBOR
BBB
8.0%
LIBOR
Which of the following statements is
correct under the comparative advantage argument if they want to
transform the interest rates between fixed and floating?
BBB borrows at 6.5% and AAA at 8%, and then they enter into a
swap
AAA borrows at 6.5% and BBB at LIBOR, and then...

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...

32. AAA and BBB both want to borrow $50 million for five years
and have been offered the following rates per annum: Fixed rate
floating rate AAA 8.0% LIBOR BBB 6.5% LIBOR Which of the following
statements is correct under the comparative advantage argument if
they want to transform the interest rates between fixed and
floating?
A) AAA borrows at LIBOR and BBB at 8.0%, and then they enter
into a swap B) AAA borrows at LIBOR and BBB at...

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...

2. Companies AAACorp and BBBCorp have been offered the following
rates per annum on a $10 million five-year loan:
Fixed rate Floating rate
AAA Corp 4.0% LIBOR - 0.1%
BBB Corp 5.2% LIBOR - 0.6%
Design an interest rate swap that will make all parties involved
(bank, two companies) attractive assuming that BBBCorp wants to
borrow at a fixed rate of interest, whereas AAACorp wants to borrow
at a flotation rate of interest linked to six-month LIBOR.

Firm X wishes to borrow U.S. dollars at a fixed rate of
interest. Firm Y wishes to borrow Japanese yen at a fixed rate of
interest. The amounts required by the two companies are roughly the
same at the current exchange rate. The companies have been quoted
the following interest rates, which have been adjusted for the
impact of taxes:
JPY
USD
Firm X:
5.0%
9.6%
Firm Y:
6.5%
10.0%
Which company has a comparative advantage in borrowing JPY and...

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?...

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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