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Fm problem

582 views 2 replies

laxmi varri

CS Final

43 Points Posted on 08 December 2012

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

Replies (2)

Guest

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%.