HI
Can anybody give me a solution for this problem please...
XYZ Ltd. holds fixed rate bonds with coupon rate of 7%.ABC Ltd. is a recipient of floating rate interest through floating rate bonds with coupons rate of LIBOR +2%. Both apprehend a fluctuation in interest rate in the coming years. ABC Ltd. and XYZ Ltd. enter into a swap arrangement through a dealer, on the following terms
- ABC Ltd. to pay floating rate interest of LIBOR +2%
- ABC Ltd. to receive from dealer fixed interest of 6.5%
- XYZ Ltd. to pay a fixed interest of 7%
- XYZ Ltd. to receive from the dealer a floating rate of LIBRO +2%
Show the cash flow position of all the three parties
thanks in advance
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Fm problem
Replies (2)
hello laxmi varri,
company fixed rate floating rate
xyz ltd 7% LIBOR +2%
abc ltd 6.5% LIBOR +2%
1) DIFFERENCE IN FLOATING RATE IS ZER0
2) DIFFERENCE IN FIXED RATE IS = 0.5% (7%-6.5%)
DIFFERENCE IN FIXED & FLOATING RATE = 0.5% (1-2)
NOTE; ASSUMPTION THAT NET GAIN 0.5% SHARED EQUALLY BETWEEN XYZ LTD,ABC LTD,DEALER.
SHARE OF XYZ LTD = 0.16%, SHARE OF ABC LTD = 0.16%, SHARE OF DEALER LTD = 0.18%(.02% GIVEN EXCESS BECAUSE OF ROUND FIGURES)
CONCLUSION:
1) ABC LTD BORROW 6.5% FIXED INTEREST RATE & LEND IT TO XYZ LTD & RECIEVE COMMISSION = 0.16. i.ee EFFECTIVE INTEREST RATE LIBOR + 1.84% ( LIBOR RATE +2% - 0.16%)
2) XYZ LTD EFFECTIVE INTEREST RATE = 6.5%+0.16+0.18 = 6.84%
3) GAIN TO DEALER EXCHANGE COMMISSION = 0.18%.
THANK U SO MUCH
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