Practice Questions (Answers in Solutions Manual)

  1. 7.1. Companies A and B have been offered the following rates per annum on a $20 million five-year loan:

    Fixed rate

    Floating rate

    Company A


    LIBOR + 0.1%

    Company B


    LIBOR + 0.6%

    Company A requires a floating-rate loan; Company B requires a fixed-rate loan. Design a swap that will net a bank, acting as intermediary, 0.1% per annum and that will appear equally attractive to both companies.

  2. 7.2. A $100 million interest rate swap has a remaining life of 10 months. Under the terms of the swap, six-month LIBOR is exchanged for 4% per annum (compounded semiannually). Six- month LIBOR forward rates for all maturities are 3% (with semiannual compounding). The six-month LIBOR rate was ...

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