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The financial analysts at Bearings and Nuts Limited a local conglomerate wants hedge the exposure of a variable interest rate loan it negotiated last year. Due to an uncertain economic environment, the fluctuation of local interest rate might affect the total long term obligations on the company’s balance sheet. As a result, the corporate risk manager indicated that the entity could enter into a swap agreement to nullify this potential exposure. Management is also considering mitigating risk by initiating a call option. The stock has a current market value of $60. However, the strike price is $50 and the option is to be exercised in 180 days. The volatility of the stock as measured by standard deviation is 40% and the annualised risk free rate is 4%. Therefore, the following spot curve was obtained with rates up to a maturity date of five years: Maturity (yrs.) Spot Rate (%) 0.5 6.90% 1 6.95% 1.5 7.50% 2 7.75% 2.5 8.17% 3 8.75% 3.5 8.90% 4 9.20% 4.5 9.55% 5 9.85 % Required a. Using the information above, calculate the swap rate that will hedge against the floating rate exposure. [ 10 marks ] b. Calculate the value of the call option [ 10 marks ] c. Use the put-call parity to calculate the value of the put [
A pension fund manager decides to invest a total of at most $45 million in U.S. Treasury bonds paying 5% annual interest and in mutual funds paying 9% annual interest. He plans to invest at least $5 million in bonds and at least $ 10 million in mutua..
If a bond is selling on the open market at $960 is it selling at a premium or discount? List 2 factors that might contribute to this selling price. What is the value today of a bond with the below attributes? What is the value of $50,000 invested at ..
consider the recent performance of the closed fund a closed-end fund devoted to finding undervalued thinly traded
A corporate bond is quoted at a price of 110.5 (% of face value) and carries a 6.0 percent coupon. The bond pays interest semi annually. What is the current yield on one of these bonds?
Newnovetel cellular is issuing bonds pay no interest but can be converted into $9K at maturity in 17 years. To price them competitively, it was determined they should yield eight percent compounded annually. At what price should Newnovatel sell these..
Company is replacing existing equipment with new equipment which can replicate what the existing machine does and also support a new product line.
Last week, Railway Cabooses paid its annual dividend of $1.20 per share. The company has been reducing the dividends by 10% each year. How much are you willing to pay to purchase stock in this company if your required rate of return is 14%?
Your firm is considering a project with a five-year life and an initial cost of $120,000. The discount rate for the project is 12%. The firm expects to sell 2,100 units a year. The cash flow per unit is $20. The firm will have the option to abandon t..
The Cement Corp is planning to replace an existing assembly with a more modern version. the old equipment was purchased 5 years ago for $500,000 and depreciated to a zero value over the 5 years. If the cost of capital is 16% and the tax rate is 40%, ..
A stock has an expected return of 10 percent, a beta of 1.50, and the expected return on the market is 8 percent. What must the risk-free rate be?
Please solve this After-tax component cost of debt problem. Assume that the federal tax rate is 40%. If the pre-tax cost of debt is 9%, what is the After Tax Cost of Debt?
A BBB-rated corporate bond has a yield to maturity of 8.3%. A U.S. Treasury security has a yield to maturity of 6.4%. These yields are quoted as APRs with semi annual compounding. Both bonds pay semi annual coupons at an annual rate of 7.3% and have ..
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