Maurice Tutor

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    Argosy University/ Phoniex University/
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    Phoniex University
    Oct-2001 - Nov-2016

Category > Management Posted 22 Nov 2017 My Price 8.00

swap bank

Company A and B can borrow $40 million for a 3-year term at the following rates. While A desires fixed-rate borrowing, B prefers floating-rate borrowing.

 

Fixed-Rate

Floating-Rate

A

8.5%

LIBOR+0.5%

B

7%

LIBOR

The swap bank currently makes a market for plain vanilla 3-year interest rate swaps at 7.25% - 7.50%.

QUESTIONS (There are toally 4 questions):

(1) Illustrate how Company A benefits from the use of interest rate swap.

(2) Summarize the risks taken by the swap bank in the interest swap with Company B.

(3) Suppose the swap bank does not customize interest rate swaps. Is it possible for Company B to get a cost saving of 0.35% from the use of quoted swaps? Explain.

(4) Suppose both Company A and B entered into the 3-year swaps with the swap bank. One year after the inception of the 3-year swaps, the swap bank quotes 2-year interest rate swaps at 6.5-7%. Which company is willing to unwind the original swap? Explain. How much it is willing to pay to unwind?

Answers

Maurice Tutor
(5)
Status NEW Posted 22 Nov 2017 10:11 PM My Price 8.00

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