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Unformatted text preview: Forward Loan. Show exactly how you need to proceed now and in certain future periods in order to accomplish your objective. Be specific as to how many zero coupon securities you would need to buy and/or issue at LIBOR rates, quantify your relevant cash flows, and determine your actual borrowing rate. C) Another way to lock in this borrowing rate is by entering into a Forward Rate Agreement (FRA) with a willing counterparty. If you do enter such an FRA, what will your gain or loss be if it turns out that 1 year borrowing rates for 2012 are 3.2% instead of 2.922%. (Remember that FRAs are settled at the beginning of the loan period.) Problem 6 A pension fund holds a portfolio of money market securities that the manager believes are paying excellent yields compared to other comparable risk short term securities. However, the manager believes that interest rates are about to fall. What type of swap will allow the fund to continue to hold its portfolio of short term securities while at the same time benefiting from a decline in rates? Ec 174 INTEREST RATE RISK p. 17 of 17 ANSWERS Table A Problem 1 Year ft A) [See table at right] 2009 0.0062 0.0104–0.015 – 1] B) πL =  $3,442.08 = [750,000(e 2010 0.0104 Problem 2 2011 0.0128 A) B0 = $1,035.10 B) D = 3.5662; D* ≈ 3.4624 2012 0.0422 C) Using modified duration, price rises by ≈ 0.8656% to $1,044.06. Using EXCEL formulas, exact price = $1,044.11. Problem 3 A) B0 ≈ $1,084.62 Flat P = $1,072.81, plus (114/181)×$37.50/2 = $11.81 accrued interest B) I = $37.50/yr C) Return = YTM = 2.8825 %/yr Problem 4 Go short with N* = 60 September T bond futures. Close the position in July. Problem 5 A) [See table at right] Table B B) Buy 3500 $1,000 par zeros maturing at end of 2011; pay about T (Yr) ry(T) ft $3,279,000. Issue 3500 × e0.02922 = 3,604 zeros maturing at end of 1 (2009) 1.890% 1.890% 2012; get ≈ $3,279,000. At the end of 2011 you collect the $3.5 2 (2010) 1.981% 2.072% million you needed to borrow. At end of 2012 you pay off $3,604,000 on your bond obligation. Your borrowing rate was 3 (2011) 2.170% 2.548% 2.928% ≈ 2.922%: 3,604,000 = 3,500,000 e0.02928(1). 4 (2012) 2.358% 2.922% C) πB = $9,716 5 (2013) 2.545% 3.293% Problem 6 [See BKM, Ch. 23, Concept Check 7]...
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 Winter '08
 Foster,C

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