Question

Matt is the CEO of a large corporation and is considering two fixed interest long-term debt options – (1) borrowing at a fixed rate of 5.5% or (2) borrowing at a floating rate of Libor + 0.3% and entering a fixed-for-floating swap at 5.25% for Libor. Which option should the company take? How much interest would the company pay for option (2) on a $20 million loan (and swap) at the end of the first year if Libor tuns out to be 4.9%?

Answer #1

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...

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;

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...

Consider two
companies, Alpha and Beta that can borrow at the rate indicated in
the table below. Assume Alpha desires floating-rate debt and Beta
desires fixed-rate debt. All interest rates are compounded
annually.
Alpha
Beta
Moody’s credit
rating
Aa
Baa
Fixed-rate
5.5%
7.0%
Floating-rate
LIBOR
LIBOR + 1%
Desires to pay at
Floating-rate
Fixed-rate
Estimate the feasibility of a swap arrangement by which the
companies can save interest payments and at the same time pay
floating- or fixed-interest payments consistent...

A borrower just paid a call premium of $100,000 today and
received the right to cap LIBOR at 5.0% on an upcoming 1-year loan
1 year from today. Assuming 1 year later, the LIBOR rate increases
to 8% and the rate on the floating rate loan is set based on this
LIBOR rate. The effective borrowing rate should be:
Notional Principal
$40,000,000
Floating rate applicable to an upcoming loan
LIBOR + 2%
Time to option expiry/lending day
1 year
Loan...

Companies X and Y have been offered the following annual
interest rates with semi-annual compounding on $5 million 6-year
loans.
Company
Fixed Rate (%)
Floating Rate
X
5.00%
LIBOR
Y
7.00%
LIBOR + 1%
Company X borrows initially at a fixed rate but would like to
have a floating rate loan. Company Y borrows initially at a
floating rate but would like a fixed-rate loan.
a) What is the Quality Spread
Differential (QSD)?
b) What is the necessary
condition for a fixed-for-floating...

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...

Consider two
companies, Alpha and Beta that can borrow at the rate indicated in
the table below. Assume Alpha desires floating-rate debt and Beta
desires fixed-rate debt. All interest rates are compounded
annually.
Alpha
Beta
Moody’s credit
rating
Aa
Baa
Fixed-rate
5.5%
7.0%
Floating-rate
LIBOR
LIBOR + 1%
Desires to pay at
Floating-rate
Fixed-rate
Estimate the feasibility of a swap arrangement by which the
companies can save interest payments and at the same time pay
floating- or fixed-interest payments consistent...

1) Company A and a bank enter a three-year, plain-vanilla
interest rate swap. Company A has floating rate debt based off
LIBOR while the bank pays a fixed rate debt.
Company A agrees to exchange the LIBOR rate for a 10% fixed rate on
$10 million notional amount. LIBOR is currently at
11%. A year later, LIBOR increases to
12%.
Question:
a) Calculate the payments for company A and the bank at end of
one year. Which party will receive...

Suppose that Company A borrows $100mil long-term at a cost of 8%
p.a. and Company B can borrow $100mil short-term at a cost equal to
the 6-month LIBOR rate plus a spread of 100 bps. Both companies
agree to enter into an interest rate swap agreement whereby A pays
the LIBOR rate plus 50 bps. to B, and B pays 8.5% p.a. fixed to A.
What is the net borrowing cost to each company?

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