Answered: What is the optimal number of swap…

Business

Finance

What is the optimal number of swap contracts into which the bank should enter?

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter8: Analysis Of Risk And Return

Section: Chapter Questions

Problem 9P

See similar textbooks

Related questions

Q: Your brother turns 35 today, and he is planning to save $7,000 per year for retirement, with the…

A: Here,Annual Savings is $7,000Time Period of Savings before Retirement is 30 yearsTime Period of…

Q: After successfully completing your corporate finance class, you feel the next challenge ahead is to…

A: Schenkel has 550,000 shares outstanding and the stock currently sells for $33.

Q: What is the expected return and standard deviation for the minimum-variance portfolio of the two…

A: Risk and return are essential financial principles. The term “risk” refers to the uncertainty and…

Q: In practice, a common way to value a share of stock when a company pays dividends is to value the…

A: Common stock is a financial security that depicts an ownership claim to a corporation. The price of…

Q: Titan Corporation has 9.3 million shares of common stock outstanding and 370,000 6.1 percent…

A: Capital structure can be defined as the proportional components of the sources of capital the…

Q: If a silver mining company wants to protect against low silver price in the future, it should short…

A: Hedging is used to prevent loss in the spot market by taking opposite position in the future…

Q: A. Assume that you have $7500 to invest. You plan to invest it for 10 years at a rate of 7% per…

A: Future Value = Present Value * (1 + Interest Rate)^Time

Q: Calculate the interest payments each year for a three-year loan of $30000 with 6% annual interest…

A: Present value of annuity formula.PV = A*wherePV = Present value of annuity A = annual paymentr =…

Q: Suppose gold is the only good in the world and today sells for $1,895 in the U.S. and for £1.249 in…

A: According to Purchasing power parity ,S1 = So * whereSo = current spot price S1 = Expected spot…

Q: What is the payoff of the butterfly spread, if the stock price equals $26 at maturity

A: A call option gives the right but not the obligation to buy at the strike price. In a butterfly…

Q: Problem 8.13 (CAPM, Portfolio Risk, and Return) Consider the following information for stucks A, B,…

A: a.A mixture of different kinds of funds and securities for the investment is termed as the…

Q: A hedger takes a long position in an oil futures contract on November 1, 2016 to hedge an exposure…

A: Hedge:A hedge is a type of investment that is used to mitigate risk or protect against potential…

Q: 1895, the first U.S. Open Golf Championship was held. The winner's prize money was 200. In 2019, the…

A: When an amount is invested somewhere, it earns interest on it.The amount initially invested is…

Q: A portfolio consists of 500 equally weighted securities. The average variance of the securities is…

A: As all securities (n) have equal weights, they have the same variance and all covariance terms are…

Q: You've collected the following information from your favorite financial website. 52-Week Price Lo…

A: Annual dividend = $2.14 52-week high price = $56.41 52-weel low price = $34.02 Required:a. Highest…

Q: Abner Corporation's bonds mature in 17 years and pay 7 percent interest annually. If you purchase…

A: Abner Corporation's bonds mature in 17 years.Purchase Price of the bonds for $1,175.

Q: The next dividend payment by Savitz, Incorporated, will be $4.65 per share. The dividends are…

A: Here, Current Stock Price is $42Expected Dividend is $4.65Growth Rate is 5%

Q: Even though most corporate bonds in Canada and the United States make coupon payments semiannually,…

A: A bond is a kind of debt security issued by the government and private companies to the public for…

Q: Which has the lower liquidity risk

A: The quick ratio (also known as the acid-test ratio) measures a company's ability to meet its…

Q: Suppose the utility function is U = E(r) - 0.5Ao2. Draw the indifference curve corresponding to a…

A: A = 3U = 0.2To draw the indifference curve for an investor with a utility function U = E(r) -…

Q: Ashburn Corporation issued 15-year bonds 2 years ago at a coupon rate of 8.8 percent. The bonds make…

A: Bonds refer to instruments that are issued for raising debt capital for the issuer from…

Q: 8. an annuity ract in 2023 that will pay On March 1, 2023, Don, age 59, paid $75,0 month beginning…

A: Annuity payment begin on March 1, at the beginning of the month. We need to sum up all payments…

Q: Firm U is an all-equity firm and has a market value of $100,000 and EBIT of $300,000. Firm L has…

A: MM Approach refers to the situation where two firms exist and both have similar rate of return to…

Q: you do it again, please, no tables, only form

A: Force of interest rate is the effective rate at which the nominal rate of interest is compounded…

Q: A thirty-year bond that pays a 3% coupon rate has a yield to miturity of 6%. With coupon payments…

A: Bonds refer to instruments issued by companies for raising debt capital from investors and other…

Q: Risk and Rates of Return; Risk in Portfolio Context holding a partfilio with the following You are…

A: The portfolio require return is calculated with the help of CAPM equation

Q: What is the expected return of a portfolio with 20% in asset A and 80% in Asset B? What is the…

A: Risk and return are essential financial principles. The term “risk” refers to the uncertainty and…

Q: An investor takes a loan for $40,000 to purchase inventory to start a business. The terms of the…

A: We take loans to buy large ticket items like a car or a house which otherwise we cannot afford. The…

Q: College tuition has been rising at a rate of 3% per year. Currently the average tuition of a state…

A: Present Value (PV) calculates the current worth of a future sum of money or a series of future cash…

Q: n investor purchases a long call at a price of $3.06. The strike price is $21. If the current stock…

A: Call option is derivative product which gives the investors right to buys stock on expiration but…

Q: Beagle Beauties engages in the development, manufacture, and sale of a line of cosmetics designed to…

A: The price of the share for next year can be found by multiplying the growth rate by the previous…

Q: The information below relates to a company that makes wooden chairs. For the forthcoming year,…

A: Fixed Cost = fc = £150,000Variable Cost = vc = £300,000Sales = s = £500,000Number of Chairs sold = n…

Q: You are looking at investing in undeveloped land that you expect might be worth $2138713 in 9 years.…

A: We need to use present value formula to calculate current price of undeveloped land.WherePV =Present…

Q: A stock just paid a dividend of $1.86. Going forward, dividends will be paid annually and grow at a…

A: In this example we can use dividend discounting model of constant growth to find out the fair price…

Q: stock of New Image Products are quite cyclical. In a boom economy, the stock is expected to re 3…

A: Expected rate is a weighted rate of return depending on the different scenarios of the economy and…

Q: Assume a company started and completed numerous jobs during July-one of which was Job Z. The company…

A: The predetermined overhead rate for machining department is The predetermined overhead rate for…

Q: An enterprise needs to set aside a fund to meet the following future annuity payments to an…

A: The payments are made at the beginning of each year. Therefore, there is an annuity due. The present…

Q: Please rank the weekdays from the highest complaints reported to the lowest for the last 8 months of…

A: First we need to determine the total complaints received in 8 months. Then the day with the highest…

Q: uppose you purchase one share of the stock of Volatile Engineering Corporation at the beginning of…

A: The rate of return calculates the gain or loss on an investment relative to the initial amount…

Q: Suppose that risk-free zero interest rates with continuous compounding are as follows: Maturity Rate…

A: Variables in the question: Maturity (years)Rate (% per annum)12.0%23.00%33.70%44.20%54.50%

Q: There is a zero coupon bond that sells for $372.88 and has a par value of $1,000. If the bond has 9…

A: Bonds are debt instruments issued by entities and companies. The bond holders receive periodic…

Q: 17) You want to buy a house and will need to borrow $215,000. The interest rate on your loan is 5.41…

A: Compound = Monthly = 12Present Value = pv = $215,000Interest Rate = r = 5.41 / 12%Time = t = 30 * 12…

Q: Earnings per common share of ABC Industries for the next year are expected to be $3.2 and to grow 8%…

A: The dividend discount model will be used here. As per the dividend discount model the value of a…

Q: Cost of Bank Loans Gifts Galore Inc. borrowed $1.6 million from National City Bank. The loan was…

A: We require the knowledge of mortgage amortization to get to the answer. The solution below will…

Q: t is no correct, can you try again, please

A: Future value of the amount is the amount of deposit made and amount of interest accumulated over the…

Q: The following figures show the optimal portfolio choice for two investors with different levels of…

A: The green curve is indifference curve Region above that has higher risk and region below it has…

Q: Lourdes Corporation's 14% coupon rate, semiannual payment, $1,000 par value bonds, which mature in…

A: Bonds are debt securities that governments or enterprises issue in order to raise capital. When you…

Q: a. Stock price in 5 years b. Stock price today

A: Price of the stock today is the PV of all future dividends and horizon value discounted at the…

Q: Fingen's 16-year, $1,000 par value bonds pay 11 percent interest annually. The market price of…

A: Time = nper = 16 YearsFace Value = fv = $1000Coupon Rate = 11%offer Market price of Bond = pv =…

Q: A Japanese company has a bond outstanding that sells for 87 percent of its ¥100,000 par value. The…

A: A bond is a kind of debt security issued by the government and private companies to the public for…

Concept explainers

Swaps

A swap is a derivative contract in which two parties are agreed to exchange their cash flows from two different financial instruments for a defined period. In swap contracts, cash flows from one financial instrument are fixed and cash flow from other financial instruments is variable based on the interest rate, exchange rate, and commodity price. Swap contracts are transacted in an over-the-counter system. Swap contracts are utilized to hedge risk and mitigate loss.

Question

A bank has assets of $500,000,000 and equity of $40,000,000. The assets have an average duration of 5.5 years, and the liabilities have an average duration of 2.5 years. An 8-year fixed-rate T-bond with the same coupon as the fixed-rate on the swap has a duration of 6 years, and the duration of a floating-rate bond that reprices annually is one year. The bank wishes to hedge its balance sheet with swap contracts that have notional contracts of $100,000. What is the optimal number of swap contracts into which the bank should enter?

		2,500 contracts.
		2,760 contracts.
		13,800 contracts.
		3,200 contracts.
		None of the above.

Expert Solution

This question has been solved!

Explore an expertly crafted, step-by-step solution for a thorough understanding of key concepts.

SEE SOLUTION Check out a sample Q&A here

Step 1: Introduction

VIEW

Step 2: Computation

VIEW

Solution

VIEW

Step by step

Solved in 3 steps with 2 images

SEE SOLUTION Check out a sample Q&A here

Knowledge Booster

Learn more about

Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, finance and related others by exploring similar questions and additional content below.

Similar questions

Suppose the Schoof Company has this book value balance sheet: The notes payable are to banks, and the interest rate on this debt is 10%, the same as the rate on new bank loans. These bank loans are not used for seasonal financing but instead are part of the companys permanent capital structure. The long-term debt consists of 30,000 bonds, each with a par value of 1,000, an annual coupon interest rate of 6%, and a 20-year maturity. The going rate of interest on new long-term debt, rd, is 10%, and this is the present yield to maturity on the bonds. The common stock sells at a price of 60 per share. Calculate the firms market value capital structure.
A 10-year government bond has face value of OR 200 and a coupon rate of 6% paid semiannually. Assume that the interest rate is equal to 8% per year. What is the bond’s price? What is the reason for the difference in price on an annual and semiannually basis? Discuss the role of financial managers.
A commercial bank invests in a loan with a current market value of $600,000 and a maturity of 3 years. The bank partially funds the loan by issuing a zero coupon bond with a maturity (principal) value of $450,000 and a duration of 3 years. The current market rate is 7% and interest rates are expected to increase by 1%. Which of the following statements is true? (a) The current equity value of the position is $150,000 and if interest rates increase the equity value will increase. (b) The current equity value of the position is $232,666 and if interest rates increase the equity value will increase. (c) The current equity value of the position is $232,666 and if interest rates increase the equity value will decrease. (d) The current equity value of the position is $150,000 and if interest rates increase the equity value will remain the same. (e) None of the given answers. The current equity value of the position is $232,666 and if interest rates increase the equity value will remain the…
A bank holds a 10-year $2 million face value bond with a duration of 8 years. The current price = $950,000. Interest rates are expected to increase from 9% to 11% over next 3 months. Demonstrate how the bank can use a forward contract to hedge the interest rate risk.
Suppose Home Depot issues 30-year bonds on which it pays a 4.00% (nominal) interest rate. Further, suppose that both Home Depot and the purchasers of its bonds anticipate inflation will average 2.00% during the life of the loan. Now suppose the inflation rate after the loan is made (i.e. after the bond is purchased) is actually 1.00% per annum. It follows that the actual real rate of interest is and, ceteris paribus, are (is) better off than anticipated as a result of the difference between the anticipated and the actual rate of inflation. Select one: a. 2.00%, Bondholders b. 2.00%, Home Depot O c. 3.00%, Bondholders d. 3.00%, Home Depot
A Bank offers both loans and deposits at a nominal interest rate of 4% that is continuously compounded A) What is the effective rate offered by the bank? B) The bank also offers a 3-year bond with face value £10000, redeemable at par, with 10% annual coupons. What is the final payment of that bond? C) Assuming there are no arbitrage opportunities, what is the price of the above bond?
A Bank offers both loans and deposits at a nominal interest rate of 4% that is continuously compounded. What is the effective rate offered by the bank? The bank also offers a 3-year bond with face value £10000, redeemable at par, with 10% annual coupons. What is the final payment of that bond? Assuming there are no arbitrage opportunities, what is the price of the above bond? Give your answer to five valid digits.
1. A bank quotes an interest rate of 14% per annum with quarterly compounding. What is the equivalent rate with (a) continuous compounding and (b) annual compounding? 2. What is meant by LIBOR and LIBID. Which is higher? 3. The 6-month and 1-year zero rates are both 10% per annum. For a bond that has a life of18 months and pays a coupon of 8% per annum (with semiannual payments and onehaving just been made), the yield is 10.4% per annum. What is the bond’s price? What isthe 18-month zero rate? All rates are quoted with semiannual compounding. 4. An investor receives $1,100 in one year in return for an investment of $1,000 now.Calculate the percentage return per annum with:(a) Annual compounding(b) Semiannual compoundingInterest Rates 97(c) Monthly compounding(d) Continuous compounding.5. Suppose that 6-month, 12-month, 18-month, 24-month, and 30-month zero rates are,respectively, 4%, 4.2%, 4.4%, 4.6%, and 4.8% per annum, with continuous compounding.Estimate the cash price of a bond…
Thai Savings Bank issues bonds as an initiative to increase domestic saving. The bonds have a face value of $40,000 each, a bond rate of 6% per year (nominal) payable semi-annually, and a maturity date of 10 years. What is the current price of this bond, if the market interest rate is 8% per year, compounded semi-annually?
After setting aside the required reserves, the bank decides to invest the remaining amount of cash. The bank invests £15 million in a coupon bond issues by UK Treasury. What remains is loaned out. The coupon bond of point (e) pays a coupon of 4% per year, paid semi-annually. It has 2 years to maturity. If the current Yield-to-Maturity is 3.5% semi-annually, what is the price of the bond?
A 10-year government bond has a face value of £100 and an annual coupon rate of 5%. Assume that the interest rate is equal to 6% per year. (a) Calculate the bond’s present value if it pays the interest annually, and also the present value if it pays semi-annually. (b) Calculate the market price of the bond when the interest rate changes to 8% please explain it on a paper with formula, not by excel.
Suppose that a bank has agreed to the following terms of an interest rate swap:- The notional principal is CAD 300 million and the remaining life of the swap is 11 months.- The bank pays 8% per annum, and receives three-month LIBOR.- Payments are exchanged every three months.- The swap (fixed) rate is 11% per annum for all maturities.- The three-month LIBOR rate a month ago was 12.5% per annum. All rates are compounded quarterly. Estimate the value of the swap using a) a bond-price valuation method, and b) a FRAs-based method?