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Consider two corporations A and B. A, a high-quality borrower, wishes to raise $50 million in five-year floating rate funding. The company can borrow fixed rate at 5% and floating rate at Libor-0.5%. B, a lower rated company, wishes to raise $50 million in five-year fixed rate funding. B finds it can borrow fixed at 7% and floating at Libor+0.5%. Suppose A borrows at the fixed rate; B at the floating rate and they both enter into a swap, whereby A pays B the Libor and receives a fixed rate of 7% - y.
a. If y=1.25%, what are the net borrowing costs for A and B?
b. (True/False) A and B would be better off, if they do not use swaps. Justify your answer in one sentence.
c. In case they decide to go with the above swap, What value of y will be more agreeable for both A and B?
a 10-year 1000 face value bond has an 8.5 annual coupon. the bond has a current yield of 8. what is the bondsyield to
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The Republic of Northern Lights, a small stable country in the North Atlantic, is experiencing a negative inflation (deflation) at this time. The annual inflation rate is -4%. If the nominal rate of interest is 6%, what is the real interest rate that..
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