Question

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?

Answer #1

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Suppose that Dummy Ltd. can borrow $100mil long-term at a cost
of 8% p.a. and Intelligent Ltd. 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 Dummy Ltd. pays the LIBOR rate plus 50 bps. to Intelligent
Ltd., and Intelligent Ltd. pays 8.5% p.a. fixed to Dummy Ltd. What
is the net borrowing cost to each company?
A....

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...

(a) Prawn and Lobster are two companies that
can borrow for a five year term at the following rates.
Prawn
Lobster
International credit rating
A
B
Fixed-rate borrowing cost
6.5%
10.5%
Floating-rate borrowing cost
LIBOR + 1%
LIBOR + 3%
(i) Calculate the quality spread differential
(QSD).
Enter your answer as a percentage to 2 decimal places, e.g.
1.23 (1 Mark)
Answer %
(ii) Develop an interest-rate swap in which
both Prawn and Lobster have an equal cost savings in...

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...

Company X and Company Y have been offered the following
rates
Fixed Rate
Floating Rate
Company X
3.5%
3-month LIBOR plus 10bp
Company Y
4.5%
3-month LIBOR plus 30 bp
Suppose that Company X borrows fixed and company Y borrows
floating. If they enter into a swap with each other where the
apparent benefits are shared equally, what is company X’s effective
borrowing rate?
A.
3-month LIBOR−30bp
B.
3.1%
C.
3-month LIBOR−10bp
D.
3.3%

Consider the borrowing costs faced by the following three
companies:
Fixed Floating
A 5.0% LIBOR+0.6%
B 6.0% LIBOR+1.3%
C 7.0% LIBOR+2.5%
Assume if entering the swap transaction, they split the possible
savings equally.
A) Company A and B want to engage in the swap transaction. What
is the possible combined savings for both companies?
B) Suppose company C wants to borrow fixed rate funds. Is it
possible for C to reduce its cost of borrowing below 7%, and if so...

Firm B, with a better credit rating, has lower borrowing costs
in both types of borrowing. Firm A and Firm B face the following
rate structure: (3pts)
Preferred
Fixed
Floating
Firm
A Fixed
8.0%
6-month LIBOR+0.6%
Firm
B
Floating
6.8%
6-month LIBOR
a) Devise a swap agreement (without a swap bank) such
that A and B will share the benefit equally? Compute the after-swap
borrowing costs for Firm A and Firm B, and also determine cost
savings for both...

Company A desires a variable-rate loan but currently has a
better deal from the fixed-rate market at a rate of 11%. If Company
A borrows from the variable-rate market, the cost would be
LIBOR+2%. In contrast, Company B, which prefers a fixed-rate loan,
has a better deal from the variable-rate market at LIBOR+3%. If
Company B borrows from the fixed-rate market, the cost would be
15%. What is the spread differential between Companies A and B?

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...

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...

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