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Three years ago, you entered into a five-year interest rate swap agreement by agreeing to pay a fixed rate of 7 percent in exchange for six-month LIBOR. If your counterparty were to default today when the fixed rate on a new two-year swap is 6.5 percent, would you experience an economic loss? Explain. 6. The Board of Bontemps International (BI) will substantially increase the company's defined-benefit pension fund's allocation to international equities in the future. However, the board wants to retain the ability to reduce temporarily this exposure without making the necessary transactions in the cash markets. You develop a way to meet the board's condition: BI enters into a swap arrangement with Bank A for a given notional amount and agrees to pay the EAFE (Europe, Australia, and Far East) Index return (in U.S. dollars) in exchange for receiving the LIBOR interest rate plus 0.2 percent (20 basis points). On the same notional amount, BI arranges another swap with Bank B under which BI receives the return on the S&P 500 Index (in U.S. dollars) in exchange for paying the interest rate on the U.S. Treasury bill plus 0.1 percent (10 basis points). Both swaps would be for a one-year term. From BI's perspective, identify and briefly describe (a) the major risk that this transaction would eliminate, (b) the major risk that this transaction would not eliminate (i.e., retain), and (c) three risks that this transaction would create. 7. A pension plan is currently underfunded by about $400 million. This situation will be resolved soon when the plan sponsor issues a $400 million private placement two-year floater bond that will be placed into the plan under a stipulation that it will be held to maturity. This bond will carry an interest rate of 50 basis points (or 0.5 percent) above the rate of U.S. Treasury bills. The actual, as well as desired, asset allocation is 50 percent bonds and 50 percent domestic equities. When the bond is added, the portfolio will become significantly overweighted in fixed-incomeinstruments. In addition, the overall duration will be decreased for the next two years. When the bond matures, the proceeds can be used to buy equities and liquid bonds with longer maturities. One Board member has suggested that futures or swaps could be used to keep the portfolio allocation in line with the desired asset allocation during the two-year period before the floater's maturity. a. Describe the transactions needed to restore the desired 50 percent/50 percent portfolio allocation using each of the following two derivative instruments: (1) futures, and (2) swaps. b. Discuss one advantage and one disadvantage of using futures instead of swaps to implement this strategy.
What is Madison's after tax cost of debt (round at 2 decimal places - such as 1.45%)
Assuming that Phoenix is not expected to pay any dividends during the coming year, determine the coefficient of variation for the rate of return on Phoenix stock.
Find a new possible investment item for Lockheed Martin, what problems are you going to have in estimating the cash flow that might be emanating from the initial investment and problems in getting it funded?
You are the beneficiary of a life insurance policy. The insurance firm informs you that you have two options for receiving the insurance proceeds.
Explain Usage of the budgeting in business environment and Discuss how budgeting can be used at your place of employment
The next dividend payment by Blue Cheese, Inc., will be $1.56 per share. The dividends are anticipated to maintain a growth rate of 4 percent forever. The stock currently sells for $29 per share.
Suppose you have been scouring The Wall Street Journal looking for stocks that are "good values" and have calculated the expected returns for five stocks. Assume the risk-free rate is 7% and the market risk premium is 2%.
The Allegheny Valley Power Company common stock has a beta of 0.80. If the current risk-free rate is 6.5% and the expected return on the stock market as a whole is 16%, determine the cost of equity capital for the firm (using the CAPM).
Please show all of your steps. I'm having issues working the formula to produce the correct answer. I found the correct answer in the practice problems but am unsure of how to get to this answer.
Find the Correction of journal entry for bond interest payment and this includes a brokerage commission of $1,250
What is an expected return and why must it equal a required return? In what circumstances are these two important?
The tax act passed in 2001 raised the contribution limit on the IRA's from $2,000 to $5,000 by 2008. What impact, if any, would you expect this provision to have on the personal savings?
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