Two companies, Company A and Company B, are looking to enter into an interest rate swapagreement.Company ACompany BFixed rate5%6%Floating Rate3-month LIBOR plus 1%3-month LIBOR plus1.5%Suppose that company A requires a floating-rate borrowing and company B requires a fixed-rating borrowing. A financial institution is planning to arrange a swap and requires 20bps spread.If benefits are equally shared both companies, what rate of interest will A and B pay?

When it comes to the world of finance, interest rate swap agreements are very useful instruments…

Answered: Two companies, Company A and Company B,…

Intermediate Financial Management (MindTap Course List)

13th Edition

ISBN:9781337395083

Author:Eugene F. Brigham, Phillip R. Daves

Publisher:Eugene F. Brigham, Phillip R. Daves

Chapter24: Enterprise Risk Management

Section: Chapter Questions

Problem 10MC

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Company A and B has been offered the following rates per annum on a £10 million 5 - year loan. Company A Fixed (%) Floating (%) LIBOR + 1.2 B LIBOR + 0.3 Company A requires a floating rate loan, whereas company B requires a fixed rate loan. In which market does company A have a comparative advantage? Design a swap that will give a bank, acting as an intermediary 0.5% p.a. and that will appear equally attractive to both companies. Explain how to achieve this, using diagrams and text.
You are an analyst at a local bank and one of your corporate customers is interested in fixed rate USD funding. Your bank desires TTD funding. The following borrowing costs are available: BORROWING COSTS Local FIRM Local BANK FIXED USD 6% 4.5% FLOATING USD LIBOR + 1% LIBOR FIXED TTD 4% 3.5% A Can a swap be structured that benefits both parties? Illustrate how a swap can be structured to benefit both partied and calculate the effective rates assuming gains are divided equally?
A company can borrow funds at LIBOR minus 50 basis points. There is a swap available where one side pays 7% and the other side pays LIBOR-1%. The company is concerned that interest rates will increase and, thus, wants to change the nature of its liability from paying floating to paying fixed rate. What rate can the company pay on its lability after it engages in the swap?
Counterparty A can borrow from the floating rate market at LIBOR + 0.5% and Counterparty B can borrow from the Eurobond market at 7%. If Counterparty A pays 7.35% into the swap and Counterparty B pays the LIBOR rate plus 0.5% into the swap, then the overall cost to borrow by Counterparty B is: a. 7.85% b. LIBOR + 0.5% С. 7% d. LIBOR + 7.5% е. 7.35%
Company A can borrow money at a fixed rate of 9 percent or a variable rate set at prime plus 1 percent. Company B can borrow money at a variable rate of prime plus 2 percent or a fixed rate of 8.25 percent. Company A prefers a fixed rate and company B prefers a variable rate. A swap dealer can bring them together for a commission of 1% on the swap deal. a) Compute the potential gain for the concerned parties through the swap deal? b) Show a swapping arrangement, ensuring that both Company A and B are better off and the swap dealer gets the 1% cut.
2. Companies A and B have been offered the following rates per annum on a $20 million five-year loan: Company A Company B Fixed Rate 5.0% 6.4% Floating Rate LIBOR+0.1% LIBOR+0.6% Company A requires a floating-rate loan; company B requires a fixed-rate loan. Design a swap that will appear equally attractive to both companies. Answer the question by using excel and explain what did you do in all the parts.
Use the following information about an interest rate SWAP contract to answer the following question. Assume ½ for the date count fraction. (Do not round intermediate calculations.) If Bank of America wants to make a book P/L of $30,000, what adjustment should it make to its LIBOR floating payments? Counter Parties Notional Principal Fixed Rate payer Fixed Rate Floating Rate Payer Floating Rate Floating Rate Reset Effective date Maturity Date Barclays & Bank of America $8,000,000 Barclays 6% (s.a.) Bank of America LIBOR+???bp (s.a.) 6 months December 21, 2020 December 21, 2023 Term (Years) Pay rate zero Discount Factor Receive rate zero 0.5 5.25% 0.9747 5.33% Discount Factor 0.9744 1 5.78% 0.9454 5.88% 0.9445 1.5 5.97% 0.9167 6.17% 0.9141 2 6.22% 0.8863 6.33% 0.8845 2.5 6.31% 0.8582 6.43% 0.8557 3 6.39% 0.8304 6.51% 0.8276 Provide you answer in basis points, rounded to two decimal points. Recall that 1% = 100 basis points. The following numbers are meant to provide guidance for…
The table below presents the costs of borrowing for Microsoft and Tesla, and the aSwap Bank quote against LIBOR. Microsoft would like to get a $3,000,000.00 floating rate loan. Tesla would like to get a $3,000,000.00 fixed rate loan. How much can the swap bank profit from entering into a swap agreement with Microsoft and another withTesla? Fixed-Rate Borrowing Cost Floating-Rate Borrowing Cost Microsoft Tesla Swap Bank Quote 4.00 8.50 Libor Libor+4.40 Bid Ask 4.05% 4.08% O $2,400 O None of the alternatives O $600 $1,500 $900
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The table below presents the costs of borrowing for Caterpillar and ExxonMobil, and a Swap Bank quote against LIBOR. Caterpillar would like to get a floating rate loan. ExxonMobil would like to get a fixed rate loan. How much can Caterpillar save by entering a swap agreement? Caterpillar ExxonMobil Swap Bank Quote 33 bps Ⓒ7 bps 23 bps None of the alternatives 10 bps Fixed-Rate Borrowing Costs 4 5.5 Bid 4.1% Floating-Rate Borrowing Cost Libor Libor+1.1 Ask 4.33%
Answer a) and b) Problem 3: Interest Swap Companies A and B have been offered the following rates per annum on a $50 million five-year loan: Company A Company B Floating LIBOR +0.7% LIBOR +1.0% Fixed 6.0% 7.5% Company A requires a floating-rate loan and company B requires a fixed-rate loan. a) Design a swap that will net a bank, acting as an intermediary, 30 basis points (0.3%) per annum and that is equally attractive to the two companies. Illustrate the swap with a diagram. b) Determine the effective financing costs for A and B.

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