Question

Looking at an Interest Rate Swap on a 10 year floating rate corporate loan portfolio and a Credit Default Swap on a fixed rate 10 year corporate bond portfolio, which will give a higher yield? Why?( points)

Answer #1

Looking at an Interest Rate Swap on a
10 year floating rate corporate loan portfolio and a Credit Default
Swap on a fixed rate 10 year corporate bond portfolio, which will
give a higher yield? Why?( points)

In an interest rate swap, BBB wishing to convert
floating rate investment to fixed-rate
investment.
Will pays fix and receive floating for the term of the swap
contract
Will receive fix and pay floating rate for the term of the swap
contract
Such a swap not possible

An investment company holds $10
million of a 5-year $100 million RST bond in its portfolio. The
bond pays interest on a fixed rate basis equal to 2.30%. Current
5-year treasury rates are 1.50% and the current 5-year swap spread
is 30 basis points.
a. To convert the bond payments to a
floating rate, the investor should enter into which type of swap
and what will be the investor’s net floating rate exposure quoted
as a spread to Libor? Be...

6. Two parties enter into a 2-year fixed-for-floating
interest rate swap with semiannual payment. The floating rate
payments are based on LIBOR as follows. Find swap fixed
rate.
Maturity (days)
Annualized rate
Discount factor, Z
180
0.05
0.9756
360
0.06
0.9434
540
0.065
0.9112
720
0.07
0.8772
After 180 days, the LIBOR rates and discount factors are
as follows:
Maturity (days)
Annualized rate
Z
180
0.045
0.9780
360
0.050
0.9524
540
0.060
0.9174
What is the market value of the...

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%....

you're looking at a one year loan for $10,000 the
interest rate is quoted at 8% plus 5 Points a point on the loan is
simply 1% of the loan amount quotes similar to this one are very
common with homework Zeus the interest rate quotation in this
example requires the border to pay five points to the lender
upfront and repay the loan later with 10% interest what is the
actual rate you are paying on this loan

Schifano Motors of Italy recently took out a 4-year €5 million
loan on a floating rate basis. It is now worried, however, about
rising interest costs. Although it had initially believed interest
rates in the Eurozone would be trending downward when taking out
the loan, recent economic indicators show growing inflationary
pressures. Analysts are predicting that the European Central Bank
will slow monetary growth driving interest rates up. Schifano is
now considering whether to seek some protection against a rise...

You are looking for at a 5 year 10% coupon bond with a BBB
rating and a 30 year 4% coupon bond with a AAA rating. Which bond
has the most default risk and why? Which bond has the most interest
rate price risk and why?

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;

20
A portfolio manager purchased $4.5MM of credit default swap
protection for International Co. with a maturity of 5 years.
International Co’s credit spread was 380 basis points when
initially purchased but it widened to 520 basis points at the end
of the first year. Give the rough calculation of the profit for the
portfolio manager (ignoring the time value of money).
Review Later
$252,000
$170,000
$420,000
$555,000

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