User Account

All Pages

Comparative advantage in borrowing floating

Assignment Help Financial Management
Reference no: EM13945234

IRS Suppose Company X is an international company and its client is requesting a 10-year $5,000,000 floating-rate loan. Company Y needs $5,000,000 to finance a 10-year project. X is an AAA-rated bank and Y is a BBB-rated company. Based on the nature of the cash flows, X should borrow floating and Y should borrow fixed. Their external borrowing costs are shown below:

fixed rate borrowing cost floating rate borrowing cost

company x 10% LIBOR

company y 12% LIBOR +1.5%

A swap bank is quoting bid-ask at 10.05-10.45% against 6-month LIBOR. Answer the following questions.

(1) Based on their borrowing costs, state which company has the comparative advantage in borrowing fixed and which has the comparative advantage in borrowing floating? Why?

(2) Based on your answer in (1), perform a fixed-for-floating interest rate swap for X and Y through a swap bank. Write in the values (interest rates) for A, B, C, D, E, and F on the diagram

(3) Calculate the savings in the borrowing costs (interest rates) for X and Y with the interest rate swap.

(4) Calculate the profit of the swap bank in the interest rate swap D=

Reference no: EM13945234

Questions Cloud

Compute the net present value of the actual cash flows : Compute the net present value of the actual cash flows as of the beginning of the investment.
Finding the present value of all the cash flows : You have determined the profitability of a planned project by finding the present value of all the cash flows from that project. Which of the following would cause the project to look more appealing in terms of the present value of those cash flows?
What premises support the conclusions in each article : What is the conclusion of each article? Define the term premises. What premises support the conclusions in each article? How convincing is the conclusion of each article
Visit the endeavour space shuttle : Visit the Endeavour Space Shuttle (any day) at the Science Center. Fees vary so visit the Reservation Desk for info. For directions click here. It's near USC in downtown LA.
Comparative advantage in borrowing floating : IRS Suppose Company X is an international company and its client is requesting a 10-year $5,000,000 floating-rate loan. Company Y needs $5,000,000 to finance a 10-year project. X is an AAA-rated bank and Y is a BBB-rated company. Based on their borro..
Topic of effective and ethical communication : Design an algorithm and use it to write a Python program that reads the contents of the data file into a list. The program should then loop, to allow a user to check various numbers against those stored in the list.
What is a lower bound for the value of the futures option : Consider a four-month futures put option with a strike price of 100 when the risk-free interest rate is 10% per annum. The current futures price is 87. What is a lower bound for the value of the futures option if it is (a) European and (b) American?
Udp and tcp use 1s complement for their checksums : Suppose you have the following 2 bytes: 01011100 and 01010110. What is the 1s complement of the sum of these 2 bytes?
Trading costs and taxes : You purchased six TJH call option contracts with a strike price of $40 when the option premium was quoted at $1.30. The option expires today when the value of TJ stock is $41.90. Ignoring trading costs and taxes, what is your total profit or loss on ..

Reviews

Write a Review

Financial Management Questions & Answers

  Interest rate futures contract that has an initial margin

You purchase an interest rate futures contract that has an initial margin requirement of 12% and a futures price of $152,140. The contract has a $125,000 underlying par value bond. If the futures price falls to $145,500, you will experience a ______ ..

  Like ordinary stocks-exchange traded funds

Treasury bond yields are commonly used as the basis for yield curves because they are low risk and homogeneous in nature. The mutual fund, and not the investor, is responsible for all income taxes on capital gains and dividends earned by the fund. Li..

  Shareholders and raise the stock price

A CFO rejects the idea of a company going private, believing that a large share repurchase program funded by issuing long-term debt would please the shareholders and raise the stock price. What would be an argument against the CFOs belief? And what i..

  Preparing an income statement-gross margin

Dinah’s Donuts is preparing an income statement. Gross sales equal $270,000. Returns and allowances equal $11,000. Cost of Goods sold equals $150,000. What is Dinah’s gross margin?

  Obtain information about corporate bonds

Go to a financial Web site, such as finance.yahoo.com, google.com/finance, or moneycentral.msn.com. Obtain information on the yields and maturity for: U.S. treasuries, Municipal bonds, Corporate bonds

  Find expected return-standard deviation and sharpe ratio

Stock X has an expected return of 12% and a standard deviation of 8%. Stock Y has an expected return of 8% and a standard deviation of 5%. The correlation coefficient between the returns for X and Y is 0.2. For parts A, B, and C, find expected return..

  Justify and criticize the usual assumption made

Justify and criticize the usual assumption made in financial management literature that the objective of a company is to maximize the wealth of its shareholders.

  Eliminate the exporters exchange rate risk

An American exporter has just sold €100,000 worth of shoes to a French customer. Payment is due in one year. Interest rates in dollars are 7.10 percent in the U.S. and 5 percent in the euro zone. The spot exchange rate is $1.25/€1.00. Use a money mar..

  What is current stock price

The Connors Company's last dividend was $1.00. Its dividend growth rate is expected to be constant at 15% for 2 years, after which dividends are expected to grow at a rate of 10% forever. Connors' required return (rs) is 12%. What is Connors' current..

  Conducted taste tests for a new coffee product

A company that franchises coffee houses conducted taste tests for a new coffee product. The company prepared four blends and randomly chose individuals to do a taste test and state which of the four blends they liked best. Results of the taste test f..

  The aftertax cost of debt

Jiminy's Cricket Farm issued a 30-year, 7.2 percent semiannual bond 7 years ago. The bond currently sells for 91.5 percent of its face value. The book value of this debt issue is $95 million. In addition, the company has a second debt issue, a zero c..

  Preferred stock-common stock and market

The Saunders Investment Bank has the following financing outstanding. Debt: 120,000 bonds with a coupon rate of 8 percent and a current price quote of 110.0; the bonds have 20 years to maturity. Preferred stock: 210,000 shares of 6 percent preferred ..

Free Assignment Quote

Assured A++ Grade

Get guaranteed satisfaction & time on delivery in every assignment order you paid with us! We ensure premium quality solution document along with free turntin report!

Submit Assignment

Academics

Major Subjects

Majors

Get In Touch

whatsapp: +1-415-670-9521

Phone: +1-415-670-9521

Email: [email protected]

TERMS & POLICIES

HELP & SUPPORT

All rights reserved! Copyrights ©2019-2020 ExpertsMind IT Educational Pvt Ltd