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Two firms X and Y are able to borrow funds as follows:
Firm A: Fixed-rate funding at 4% and floating rate at Libor-1%.
Firm B: Fixed-rate funding at 5% and floating rate at Libor+1%.
Assume A prefers fixed rate and B prefers floating rate. Show how these two firms can both obtain cheaper financing using a swap. What swap strategy would you suggest to the two firms if you were an unbiased advisor? What is the net cost to each party in the swap? Show your work in detail.
Paul receives a 90-day letter after his meeting with and appeals officer. He is not satisfied with the $101,000 settlement offer. Briefly identify the relevant tax research issues facing Paul. The pertinent facts of both the case and the ruling match..
Delta Motors has bonds outstanding which will mature in 12 years. What is the bonds’ yield to call?
An interest rate is 12% when expressed with quarterly compounding. What is the equivalent rate with semiannual compounding? The two-year zero rate is 6% and the three-year zero rate is 6.5% (both continuously compounded). What is the forward rate for..
Given the returns and probabilities for the three possible states listed here, calculate the covariance between the returns of Stock A and Stock B.
the one type of bond that you should avoid is a zero coupon bond, because such bonds do not pay any interest.
How and why are futures, forwards and options used by international firms?
A company is considering a new project. The company s CFO plans to calculate the project's NPV by discounting the relevant cash flows (which include the initial investment, the operating cash flows, and the salvage values) at the company's cost of ca..
Interpret the coefficient on after-tax wages. What does this coefficient imply about the effect of increasing wages from $6 to $10 per hour on labor supply?
You've been analyzing a $10 million capital investment with a 5-year useful life, but it has a negative NPV of $500,000. However, the SVP of Operations just phoned with good news: The initial investment in the capital asset will be $1 million less th..
What are convertible securities? A firm utilizes a strategy of capital rationing, which is currently $375,000 and is considering the following two projects: Using a 6% cost of capital, what is the net present value of project A?
A 4-month European call option on a dividend-paying stock is currently selling for $5. What opportunites are there for an arbitrageur?
What is the percentage of your wealth to put into asset X to achieve zero variance? Graph the opportunity set and the zero variance point.
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