Question

You currently borrow money at a fixed rate of 5%. However, your operating income is heavily...

You currently borrow money at a fixed rate of 5%. However, your operating income is heavily dependent on changes in interest rates (direct relationship). You would like to reduce the volatility of your EPS and are considering interest rate swaps. Should you enter into a swap agreement where you pay a fixed rate to the bank and receive a floating rate or should you pay a floating rate to the bank and receive fixed. Explain how this will reduce the volatility of your EPS.

Homework Answers

Answer #1

As the volatility of operating costs and the interest rate are directly proportional if the interest increases cost will also increase. From the above option on swaps agreement to reduce the volatility of the EPS, we should take the swap agreement in which we pay a floating rate to the bank and receive a fixed rate because at a constant rate of return we can able to meet any obligation which has to pay, like debt. with floating rate which we will pay to the bank will be volatile and can be managed through constant rate of return.

Know the answer?
Your Answer:

Post as a guest

Your Name:

What's your source?

Earn Coins

Coins can be redeemed for fabulous gifts.

Not the answer you're looking for?
Ask your own homework help question
Similar Questions
28. Your firm can borrow at a fixed rate of 8% or a floating of LIBOR+1%....
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...
10)You enter a long position in a € future contract with the size of €125,000 today....
10)You enter a long position in a € future contract with the size of €125,000 today. The futures expire in 90 days. The interest rates are i$=2% and i€=4%. The current spot rate is $1.38/€. Assume 360 days a year. If the spot rate is $1.43/€ the next day and interest rates remain the same, How much is your profit or loss for this day? Select one: a. $6228.80 b. $3974.78 c. $6250 d. -$6228.80 e. -$3974.78 12) National Bank...
Question (1) Firm “A” prefers to borrow float-rate while firm “B” prefers to borrow fixed-rate. “A”...
Question (1) Firm “A” prefers to borrow float-rate while firm “B” prefers to borrow fixed-rate. “A” is offered 4.5% fixed rate and LIBOR float rate, while “B” is offered 6% fixed rate and LIBOR+0.5% float rate. If both firms approach you as an MSF elite graduate for a consultation to reduce their borrowing costs, suggest (voluntarily) an interest rate swap structure where “A” benefits 75% of the cost reduction and “B” benefits 25% of the cost reduction. A B Issue...
Exercise A-4 (Algo) Derivatives; interest rate swap; fixed rate debt; fair value change unrelated to hedged...
Exercise A-4 (Algo) Derivatives; interest rate swap; fixed rate debt; fair value change unrelated to hedged risk [LOA–2] LLB Industries borrowed $330,000 from Trust Bank by issuing a two-year, 12% note, with interest payable quarterly. LLB entered into a two-year interest rate swap agreement on January 1, 2021, and designated the swap as a fair value hedge. Its intent was to hedge the risk that general interest rates will decline, causing the fair value of its debt to increase. The...
National Bank has a $200b of Adjustable Rate Mortgage (ARM) as assets on its balance sheet....
National Bank has a $200b of Adjustable Rate Mortgage (ARM) as assets on its balance sheet. The interest rate on the ARM is 3%+Libor. As a result, the bank will receive floating interest. The bank is considering hedging the risk in the interest income from the assets with a three-year interest rate swap. What should be the bank’s receipt and payment cash flows in the swap? Select one: a. The Bank should pay Libor and receive fixed interest rate. b....
You buy a 30 day put option on Swiss franc (CHF) to hedge an account receivable...
You buy a 30 day put option on Swiss franc (CHF) to hedge an account receivable of CHF 800,000. The strike price is USD/CHF 0.96. Assuming a scenario where the spot USD/CHF in 30 days is 0.92, which of the following is true? Select one: A. The decision to exercise the put or not depends on the size of the premium paid. B. The put is ITM and should be exercised by the company. C. The put is OTM and...
(a) Prawn and Lobster are two companies that can borrow for a five year term at...
(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...
Firm X wishes to borrow U.S. dollars at a fixed rate of interest. Firm Y wishes...
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...
Schifano Motors of Italy recently took out a 4-year €5 million loan on a floating rate...
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...
Schifano Motors of Italy recently took out a 4-year €5 million loan on a floating rate...
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...
ADVERTISEMENT
Need Online Homework Help?

Get Answers For Free
Most questions answered within 1 hours.

Ask a Question
ADVERTISEMENT