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A company has issued floating-rate notes with a maturity of one year, an interest rate of LIBOR plus 125 basis points, and total face value of $50 million. The company now believes that interest rates will rise and wishes to protect itself by entering into an interest rate swap. A dealer provides a quote on
a swap in which the company will pay a fixed rate 6.5 percent and receive LIBOR. Interest is paid quarterly, and the current LIBOR is 5 percent.
Show all your calculations and explain in details.
(a) Indicate how the company can use a swap to convert the debt to a fixed rate.
(b) Calculate the first payment made by the company. Assume that all payments will be made on the basis of 90/360.
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Christy bought an 8% bond price at 95% of par that has 10 years until it matures. 1 year later the yield to maturity on this bond is 8.2%. What return did Christy earn on this bond?
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