Chapter13 - Chapter Thirteen Swaps and Interest Rate...

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Chapter Thirteen Swaps and Interest Rate Options Answers to Problems and Questions 1. In an interest rate swap, the swap seller is the party paying the floating rate. 2. The swap tenor is the length (in time) of the swap arrangement. The swap price is the fixed interest rate on the swap. 3. The only adjustments to the numbers in Figure 13-2 are that the big firm would be paying 30 basis points more (LIBOR minus 20 bp instead of LIBOR minus 50 bp) and the smaller firm would be paying 30 basis points less . The net rates would be LIBOR – 20 for the big firm and 9.25% for the smaller. 4. The larger firm often has the advantage in negotiating, either because of its credit rating or its standing in the marketplace. The smaller firm, with less bargaining power, may have to bear the cost of the fee in order to complete the swap. 5. A swap is generally less risky than a loan because the principal amount does not change hands. If one party defaults, the other party does not lose any principal; they merely lose the advantage of the lower interest rate payment. 6. The firm receiving the difference check would not logically default because doing so would cause the other firm to cease sending them money. The firm receiving the difference check pays no money out. 7. a) duration gap = s liabilitie assets D x s liabilitie Total assets Total D - D assets = 5.51 8.43 x 2900 1400 3.47 x 2900 1200 0 x 2900 300 = + + D
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Chapter13 - Chapter Thirteen Swaps and Interest Rate...

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