fm23 3 - SOLUTIONS TO END-OF-CHAPTER PROBLEMS 23-1 If Zhao...

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Answers and Solutions: 23 - 4 SOLUTIONS TO END-OF-CHAPTER PROBLEMS 23-1 If Zhao issues fixed rate debt and then swaps, its net cash flows will be: 7% + 6.8% LIBOR = (LIBOR + 0.2%). 23-2 The price of the hypothetical bond is \$1,000(89 + 8/32)/100 = \$892.50. Using a financial calculator, we can solve for r d as follows: N = 40; PV = -892.50; PMT = 30; FV = 1000; solve for I/YR = 3.504. The annual value of r d is 3.504% × 2 7.01%. 23-3 Futures contract settled at 100 16/32% of \$100,000 contract value, so PV = 1.005 × \$1,000 = \$1,005 × 100 bonds = \$100,500. Using a financial calculator, we can solve for r d as follows: N = 40; PV = -1005; PMT = 30; FV = 1000; solve for I = r d = 2.9784% × 2 = 5.9569% 5.96%. If interest rates increase to 6.9569%, then we would solve for PV as follows: N = 40; I = 6.9569/2 = 3.47845; PMT = 30; FV = 1000; solve for PV = \$897.4842 × 100 = \$89,748.42. Thus, the contact’s value has decreased from \$100,500 to \$89,748.42. 23-4
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