Answers and Solutions:
23  4
SOLUTIONS TO ENDOFCHAPTER PROBLEMS
231
If Zhao issues fixed rate debt and then swaps, its net cash flows will be:
−
7% + 6.8%
−
LIBOR =
−
(LIBOR + 0.2%).
232
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%.
233
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.
234
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 Spring '08
 Staff
 Finance, Derivative, Interest Rates, Debt, Forward contract, net cash flows

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