Question

In: Finance

                                     Fixed Rate    &nbs

                                     Fixed Rate                                      Floating Rate
Company A                         5.50% LIBOR + 1.05%
Company B                          6.75%                                         LIBOR + 1.75%
Assuming comparative advantage and the agree upon rate of 6.45%, after entering into an interest rate swap determine the cost of financing for Company A and Company B. Who are the main users of interest swaps and currency swaps?
6. A U.S. investor purchased stock in Toyota, the rate of return on the stock in yen was 8.65% and the yen appreciated by 2.34%, determine the exact total return to the investor.

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Expert Solution

Answer to question 5

Company A borrows at a fixed rate of 5.50%

Company B borrows at a variable rate of LIBOR+1.75%

Company B pays a fixed rate of 6.45% to company A

Company A

Borrows at                5.5%

Receives from Company B   (6.45%)

Pays to Company B          LIBOR

Net Interest Cost            LIBOR - 0.95%

Company B

Borrows at                LIBOR+1.75%

Receives from Company A   (LIBOR)

Pays to Company A           6.45%

Net Interest Cost               8.2%

Answer to question 6

If Yen appreciates by 2.34% then exact total return to investor shall be:

Return x 1.0234

= 0.0865 x 1.0234

= 0.0885 i.e, 8.85%

Alternatively, it can also be considered that Yen appreciation will be applicable to the amount of principal as well. In such case the answer would be:

=(1+0.0865)(1+0.0234)-1

=0.1119 i.e, 11.19%

jeff jeffy answered 6 months ago
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