Question

In: Finance

Assume firm A wants to borrow float while firm B wants to borrow fixed. Firm A...

Assume firm A wants to borrow float while firm B wants to borrow fixed. Firm A is offered 10% fixed borrowing cost and LIBOR + 0.3% float borrowing cost while firm B is offered 11.2% fixed borrowing cost and LIBOR + 1% float borrowing cost.

(a) Show how the two firms can reduce their borrowing costs equally by entering into an interest rate plain vanilla swap? Use a table to demonstrate your solution

(b) If the agreed-upon notional amount is $100m (no need to know the swap tenor), how much each party annually pays the other in absolute amounts? (assume that the LIBOR = 5%).

Show your answer in a table

Solutions

Expert Solution

jeff jeffy answered 1 year ago
Next > < Previous

Related Solutions

Assume firm A wants to borrow float while firm B wants to borrow fixed. Firm A...
Assume firm A wants to borrow float while firm B wants to borrow fixed. Firm A is offered 10% fixed borrowing cost and LIBOR + 0.3% float borrowing cost while firm B is offered 11.2% fixed borrowing cost and LIBOR + 1% float borrowing cost. (a) Show how the two firms can reduce their borrowing costs equally by entering into an interest rate plain vanilla swap? Use a table to demonstrate your solution (b) If the agreed-upon notional amount is...
Assume firm A wants to borrow float while firm B wants to borrow fixed. Firm A...
Assume firm A wants to borrow float while firm B wants to borrow fixed. Firm A is offered 10% fixed borrowing cost and LIBOR + 0.3% float borrowing cost while firm B is offered 11.2% fixed borrowing cost and LIBOR + 1% float borrowing cost. Show how the two firms can reduce their borrowing costs equally by entering into an interest rate plain vanilla swap? Use a table to demonstrate your solution If the agreed-upon notional amount is $100m (no...
Assume that: float a, b, c, d, f; and variables b, c, d, f are initialized....
Assume that: float a, b, c, d, f; and variables b, c, d, f are initialized. Write a line of c++ code that calculates the formula below and stores the result to the variable a:
Firm X wishes to borrow U.S. dollars at a fixed rate of interest. Firm Y wishes...
Firm X wishes to borrow U.S. dollars at a fixed rate of interest. Firm Y wishes to borrow Japanese yen at a fixed rate of interest. The amounts required by the two companies are roughly the same at the current exchange rate. The companies have been quoted the following interest rates, which have been adjusted for the impact of taxes: JPY USD Firm X: 5.0% 9.6% Firm Y: 6.5% 10.0% Which company has a comparative advantage in borrowing JPY and...
Company A and B can borrow for a 3-year term at the following rates. While A...
Company A and B can borrow 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% - 7.5%. Illustrate how Company A benefits from the use of interest rate swap. Summarize the risks taken by the swap bank in the interest swap...
Two companies have investments which pay the following rates of interest: Fixed Float Firm A 6%...
Two companies have investments which pay the following rates of interest: Fixed Float Firm A 6% Libor Firm B 8% Libor+0.5% Assume A prefers a fixed rate and B prefers a floating rate. Show how these two firms can both benefit by entering into a swap agreement. If an intermediary charges both parties equally a 0.1% fee and any benefits are spread equally between Firm A and Firm B, then 1) what rates could A and B receive on their...
Two companies have investments which pay the following rates of interest: Fixed Float Firm A 6%...
Two companies have investments which pay the following rates of interest: Fixed Float Firm A 6% Libor Firm B 8% Libor + 0.5% Assume A prefers a fixed rate and B prefers a floating rate. If an intermediary charges both parties equally a 0.1% fee and any benefits are spread equally between Firm A and Firm B. If an intermediary charges both parties equally a 0.1% fee and any benefits are spread equally between Firm A and Firm B, what...
*URGENT* Two companies have investments which pay the following rates of interest: Fixed Float Firm A...
*URGENT* Two companies have investments which pay the following rates of interest: Fixed Float Firm A 6% Libor Firm B 8% Libor+0.5% Assume A prefers a fixed rate and B prefers a floating rate. Show how these two firms can both benefit by entering into a swap agreement. If an intermediary charges both parties equally a 0.1% fee and any benefits are spread equally between Firm A and Firm B, then 1) what rates could A and B receive on...
Tom wants to purchase a property for $300,000. He can borrow a 80% LTV fixed-rate loan,...
Tom wants to purchase a property for $300,000. He can borrow a 80% LTV fixed-rate loan, with 4.5% annual interest rate and a 3% origination fee. Or, he can borrow a 90% LTV fixed-rate loan, with 5.5% annual interest rate, and a 3% origination fee. Both loans have a 30 year amortization period. If he plans to prepay the loan at the end of 3rd year, what will be the incremental cost of borrowing for him to to borrow the...
start-up entrepreneur wants to determine how much he can borrow in the form of a fixed-rate...
start-up entrepreneur wants to determine how much he can borrow in the form of a fixed-rate 20-year loan from bank. The loan for 20 years carries a fixed interest rate of 9.00%. He estimates that he can pay a maximum of $25,000 annual repayment (interest plus principal). How large a loan can he afford, assuming he makes steady repayments of $25,000 per year for 20 years? How much total interest will be paid over the 20-year life of the mortgage?...
ADVERTISEMENT
Subjects
ADVERTISEMENT
Latest Questions
ADVERTISEMENT