Question

Company T with total assets of $370 million and equity of $35 million has a leverage adjusted duration gap of +0.20 years. One-year maturity notes are currently priced at par and are paying 4.5 percent annually. Two-year maturity notes are currently priced at par and are paying 6 percent annually. The terms of a swap of $100 million notional value of liabilities' payments are 4.95 percent annual fixed payments in exchange for floating rate payments tied to the annual discount yield. Discuss your results.

a. What is the forward one-year discount yield expected next year?

b. What are the expected end-of-year profits or losses if the bank hedges its interest rate risk exposure using the swap?

Answer #1

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Company T with total assets of $370 million and equity of $35
million has a leverage adjusted duration gap of +0.20 years.
One-year maturity notes are currently priced at par and are paying
4.5 percent annually. Two-year maturity notes are currently priced
at par and are paying 6 percent annually. The terms of a swap of
$100 million notional value of liabilities' payments are 4.95
percent annual fixed payments in exchange for floating rate
payments tied to the annual discount...

Company T with total assets of $370 million and equity of $35
million has a leverage adjusted duration gap of +0.20 years.
One-year maturity notes are currently priced at par and are paying
4.5 percent annually. Two-year maturity notes are currently priced
at par and are paying 6 percent annually. The terms of a swap of
$100 million notional value of liabilities' payments are 4.95
percent annual fixed payments in exchange for floating rate
payments tied to the annual discount...

The Integrated Products Co. currently has debt with a market
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has 12 million shares of common stock outstanding currently priced
at $32.11 per share. The stock’s beta is 1.22, the market risk
premium is 12.4% and T-bills yield 2.4%. If the company is subject
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There are 2 million common shares of stock outstanding,
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The most recent dividend paid was $4 per share.
Dividends are expected to increase by 2% per year for the
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There are 25,000 bonds outstanding with a coupon rate of 5% that
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There are 75,000 bonds outstanding with a...

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and 8% coupon rate with semi-annual payments, and are priced to
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the bonds will be priced at par and have a yield of 13.65%; if it
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Peace Waterfront Ltd currently has 1.2 million ordinary shares
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and 8% coupon rate with semi-annual payments, and are priced to
yield 13.65%. If Peace Waterfront issues up to $2.5 million of new
bonds, the bonds will be priced at par and have a yield of 13.65%;
if it issues bonds beyond $2.5 million, the expected...

Peace Waterfront Ltd currently has 1.2 million ordinary shares
outstanding and the share has a beta of 2.2. It also has $10
million face value of bonds that have 5 years remaining to maturity
and 8% coupon rate with semi-annual payments, and are priced to
yield 13.65%. If Peace Waterfront issues up to $2.5 million of new
bonds, the bonds will be priced at par and have a yield of 13.65%;
if it issues bonds beyond $2.5 million, the expected...

Consider the following capital structure for AAA Corporation.
The company has one debt issue, preferred stock and common stock in
its capital structure. The firm’s tax rate is 40%; the risk-free
rate is 3%.
Details on the components of the capital structure are listed
below.
Bond issue:
Preferred equity:
Common equity:
Coupon-paying issue
$100 million par
10% semiannual coupon
Remaining maturity of 15 years
Currently priced in market at 90% of par value
Coupon-paying issue
$50 million par
6% annual...

The Imaginary Products Co. currently has debt with a market
value of $275 million outstanding. The debt consists of 9 percent
coupon bonds (semiannual coupon payments) which have a maturity of
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Suppose the First National Bank of Austin has $500.00 million in
total assets with an average asset duration of five years. Assume
that the bank’s liabilities are comprised of $86.75 million of
demand deposits and $163.75 million in bonds with a 4.00% coupon
rate (which pays annually) and a five year time-to-maturity.
Further assume that current market interest rates are at 9.00% per
annum. Show work. (a.) Calculate the duration of the bank’s bonds.
(b.) What is this bank’s duration...

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