Question

In: Finance

76. ABC International can borrow $4,000,000 at LIBOR plus a lending margin of .65 percent per...

76. ABC International can borrow $4,000,000 at LIBOR plus a lending margin of .65 percent per annum on a three-month rollover basis from Barclays in London. Three month LIBOR is currently 5.5 percent. Suppose that over the second three-month interval LIBOR falls to 5.0 percent. How much will ABC pay in interest to Barclays over the six-month period for the Eurodollar loan?

A. $50,000

B. $100,000

C. $118,000

D. $120,000

77. You entered in to a 3 × 6 forward rate agreement that obliged you to borrow $10,000,000 at 3%. Suppose at the maturity of the FRA, the correct interest rate is 3½%. Clearly you are better off since you have the ability to borrow $10,000,000 for 3 months at 3% instead of 3½%. What is the payoff at the maturity of the FRA? A. Net payment of $12,391.57 to you

B. Net payment of $12,500 to you

C. Net payment of $50,000 to you

D. Net payment of $48,309.18 to you

78. A bank bought a "three against six" $5,000,000 FRA for a three-month period beginning three months from today and ending six months from today. The reason that the bank bought the FRA was to hedge: the bank accepted a 3-month deposit and made a six-month loan. The agreement rate with the seller is 5.0%. Assume that three months from today the settlement rate is 5.25%. Who pays whom? How much? When? The actual number of days in the FRA is 90.

A. The bank pays $3,0084.52 at the end of 3 months

B. The bank pays $3,0084.52 at the end of 6 months

C. The counterparty pays $3,0084.52 at the end of 3 months

D. The counterparty pays $3,0084.52 at the end of 6 months

Solutions

Expert Solution

76. Current 3 month LIBOR is 5.5%, so that interest to be paid is 5.5%+0.65% = 6.15%. Thus interst for the first 3 months = 6.15%*4 million *1/4 (as it is quarterly) = $61,500

Now LIBOR changes to 5% and so the interest rate is 5.65%. So interst for next 3 months = 5.65%*4 million *1/4 = $56,500

Total interest paid over 6 month period = 61,500 + 56,500 = $118,000

Hence choice C is the correct answer.

77. A 3*6 FRA means the rate at which we can borrow after 3 months for (6-3) 3 months.

After 3 months you can borrow $10 million @3% as against @3.5% (which is the current rate)

Now after 6 months, your gain is 0,5%*10 million *1/4 = $12,500

Now this needs to be discounted back by 3 months at 3.5% i.e. PV of payoff = 12500 / (1+3.5%)^1/4 = $12,392.96

Hence Choice A is the correct Answer

78. Agreement rate is 5% but the settlement rate is 5.25%. So bank will receive as the rate after 3 months is 5.25% (as against the agreement rate os 5%)

So Interest gain over next 3 months = 0.25%*5 million *90/365 = $3,082.19

So this must be discounted by 3 months to calculate the PV of the gain. i.e. 3125 / 1.0525^(90/365)= $3,085.28

So Couterparty pays $3,0043.52 at the end of 3 months

Choice D is the correct answer.


Related Solutions

Alphaget Inc., borrows $1,500,000 at LIBOR plus a lending margin of 1.25 percent per annum on...
Alphaget Inc., borrows $1,500,000 at LIBOR plus a lending margin of 1.25 percent per annum on a three-month rollover basis from a London bank. If three-month LIBOR is 4 ½ percent over the first three-month interval and 5 3/8 percent over the second three-month interval, how much will Alphaget pay in interest over the first year of its Eurodollar loan? Select one: a. $43,057 b. $46,406 c. $47,658 d. $49,432
2. Retail Manufacturing of NYC, borrows $2,500,000 at LIBOR plus a lending margin of 1.15 percent...
2. Retail Manufacturing of NYC, borrows $2,500,000 at LIBOR plus a lending margin of 1.15 percent per annum on a six-month rollover basis from a London bank. If six-month LIBOR is 3 ½ percent over the first six-month interval and 4 3/8 percent over the second six-month interval, how much will Grecian Tile pay in interest over the first year of its Eurodollar loan? You will use the provided information to Calculate the paid interest over the first year of...
Suppose firm Alpha can borrow either at 6% or Libor + 1% and firm Beta borrow...
Suppose firm Alpha can borrow either at 6% or Libor + 1% and firm Beta borrow either at 8% or Libor + 2%. Assume that there is a swap bank who is willing to distribute any benefit by keeping 1/5th to itself, and 2/5th each to Alpha and Beta. Which of the following is false based on the above information? Alpha is going to receive 5.8% from the swap bank for Libor. Beta’s borrowing net borrowing rate is 7.6% after...
The Green Giant has a 6 percent profit margin and a 65 percent dividend payout ratio....
The Green Giant has a 6 percent profit margin and a 65 percent dividend payout ratio. The total asset turnover is 1.5 and the equity multiplier is 1.6. What is the sustainable rate of growth?
An insurance company owns RM50 million of floating-rate bonds yielding LIBOR plus 1 percent. These loans...
An insurance company owns RM50 million of floating-rate bonds yielding LIBOR plus 1 percent. These loans are financed by RM 50 million of fixed-rate guaranteed investment contracts (GICs) costing 10 percent. A finance company has RM 50 million of auto loans with a fixed rate of 14 percent. The loans are financed by RM 50 million of CDs at a variable rate of LIBOR plus 4 percent. a)  What is the risk exposure of the insurance and finance company? (b)Propose a...
SBC Inc. needs floating rate dollars, which it can borrow at LIBOR + 1%. Fixed rate...
SBC Inc. needs floating rate dollars, which it can borrow at LIBOR + 1%. Fixed rate dollars are available to the firm at 8.0% per year. CCS Steel Corp. can borrow fixed-rate dollars at annual rate of 11% or floating rate dollars at LIBOR + 2% per year. CCS would prefer to borrow fixed rate dollars. Is it possible to arrange a swap agreement so that both firms benefit equally from the swap? If yes, explain how much SBC would...
Two companies, ABC and XYZ, are considering entering into a swap. Company ABC can borrow at...
Two companies, ABC and XYZ, are considering entering into a swap. Company ABC can borrow at a fixed rate of 8.1% or, alternatively LIBOP + 1.3%. Company XYZ faces a fixed rate of 7.5% and a floating rate of LIBOR + 0.3%. a) Suppose that company ABC wants a floating rate loan, while company XYZ wants a fixed rate loan. Is there a basis for a swap? If so, set up the swap under the assumption that interest rate savings...
The current market price for ABC is $79 per share. Initial margin is 50%, maintenance margin...
The current market price for ABC is $79 per share. Initial margin is 50%, maintenance margin is 35% and there is no margin interest. ABC pays annual cash dividends of $3.95 per share. You believe the stock price will decrease over the next year and wish to sell short using margin. Suppose you are correct and the stock falls to $62 per share at the end of the year. What is your percentage return on equity for this trade?
ABC bank has agreed to receive 3-month LIBOR and pay 8% per annum on a notional...
ABC bank has agreed to receive 3-month LIBOR and pay 8% per annum on a notional principal of $100 million. The swap has a remaining life of 11 months. The LIBOR spot rates for 2-month, 5-month, 8-month, and 11-month, are 6.5%, 7%, 7.5%, and 8%, respectively. The 3-month LIBOR rate at the last payment date was 6%. Estimate the value of the swap to ABC Bank by estimating the values of the floating leg and the fixed leg. Use the...
An investor purchased 200 shares of stock at $100 per share on 65% margin. Suppose the...
An investor purchased 200 shares of stock at $100 per share on 65% margin. Suppose the maintance margin is 40% at what price does the investor get a margin call? Regarding the previous question, if the price declines to $70 per share whats the return to the investors equity? What if the stock price rises to $150 per share? ignore interest and transaction costs.
ADVERTISEMENT
ADVERTISEMENT
ADVERTISEMENT