1. Companies A and B have been offered the following rates per annum on a $10 mi
ID: 2698342 • Letter: 1
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1. Companies A and B have been offered the following rates per annum on a $10 million 5-year investment: Fixed rate Floating rate Company A 10.0% LIBOR Company B 10.8% LIBOR Company A requires (desires to receive) a fixed-rate on its investment but currently is receiving float; company B requires (desires to receive) a floating rate on its investment but is getting fixed rate. You are ask to design a swap that will net a bank, acting as intermediary, 0.2%, per annum and the swap will be equally attractive to A and B enabling them to get the desired rates. Which of the following you recommend? Answer Let B receives 10.8% fixed on its investment, pay 10.5% fix to bank, bank pay 10.3% to A. Let A receive LIBOR for its investment, pay that LIBOR to the bank and bank to pay B the LIBOR received from A. Let B receives 10.8% fixed on its investment, pay 10.4% fix to bank, bank pay 10.2% to A. Let A receive LIBOR for its investment, pay that LIBOR-0.1% to bank and bank passes the LIBOR-0.1% to B. (a) and (b) None of the above 1. Companies A and B have been offered the following rates per annum on a $10 million 5-year investment: Fixed rate Floating rate Company A 10.0% LIBOR Company B 10.8% LIBOR Company A requires (desires to receive) a fixed-rate on its investment but currently is receiving float; company B requires (desires to receive) a floating rate on its investment but is getting fixed rate. You are ask to design a swap that will net a bank, acting as intermediary, 0.2%, per annum and the swap will be equally attractive to A and B enabling them to get the desired rates. Which of the following you recommend? Let B receives 10.8% fixed on its investment, pay 10.5% fix to bank, bank pay 10.3% to A. Let A receive LIBOR for its investment, pay that LIBOR to the bank and bank to pay B the LIBOR received from A. Let B receives 10.8% fixed on its investment, pay 10.4% fix to bank, bank pay 10.2% to A. Let A receive LIBOR for its investment, pay that LIBOR-0.1% to bank and bank passes the LIBOR-0.1% to B. (a) and (b) None of the above Fixed rate Floating rate Company A 10.0% LIBOR Company B 10.8% LIBORExplanation / Answer
A desires fixed rate and B requires floating.
So the swap arrnagement should be in such a way that bank pays A fixed and B floating and charge a commision of 0.2%..
the correcvt answer is a) Let B recives 10.8% fixed on its investment, pay 10.5% to the bank, bank pay 10.3% to A. Let A recive LIBOR for its investment, pay that LIBOR to the bank and bank pay B the libor recived from A.
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