FIN 417- Assignment #3

FIN 417- Assignment #3 - Nick Connolly FIN 417 Assignment#3...

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Nick Connolly FIN 417 Assignment #3 Problems 11/28/11 1. Below is the 5-year swap quote for ABC Limited. Issue is the coupon return on 5-year U.S. Treasury bond. Price refers to the amount ABC would pay (bid) or receive (offer) should they need to buy or sell 5-year Treasuries. Yield is the yield-to-maturity ABC would earn or pay on the Treasuries. Spread refers to the swap dealer’s commission spread (in basis points) for setting up the swap. Suppose ABC wants to swap fixed-for-floating (ABC will receive Libor). What is your estimate of the fixed rate that ABC will pay? Swap Rate Sheet 7-Aug-98 Yr Issue Price Yield Spread bid offer bid offer bid offer 5 5.625 101.01 101.03 5.618 5.603 24 32 The company will have to borrow T-bonds and sell them. Hence, they will realize the bid yield. They will then have to buy the swap so they will pay the offer swap yield. Therefore, 5.618 + 0.32 = 5.938% 2. Suppose Yanqui Inc. wishes to borrow U.S. dollars at a fixed rate of interest. Samurai Corp wishes to borrow Japanese yen at a fixed rate of interest. The amounts required by the two companies are the same at the current exchange rate. The companies have been quoted the following interest rates which have been adjusted to reflect the tax situations of both firms: Yen Dollars Yanqui Inc. 5.0% 9.6% Samurai Corp. 6.5% 10.0% Design a swap that will net a bank acting as an intermediary, 50 basis points per annum. Make the swap equally attractive to the two companies and, ensure that any foreign exchange risk is assumed by the bank. (show all your work - a diagram is acceptable.) 1.5% Difference between Yen rates, 0.4% Difference between Dollar rates, Bank gets 0.5%; 60 bp to work with. Yanqui borrows $ at 9.6 – 0.3 = 9.3% and Samurai borrows Yen at 6.5 – 0.3 = 6.2%. 3.
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This note was uploaded on 11/15/2011 for the course FIN 417 taught by Professor Griffith during the Fall '11 term at Miami University.

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FIN 417- Assignment #3 - Nick Connolly FIN 417 Assignment#3...

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