Chase Bank holds a $200 million loan to Argentina. The loans are being traded at bid-offer prices of 91-93 per 100 in the London secondary market.
a. If Chase has an opportunity to sell this loan to an investment bank at a 7 percent discount, what are the savings after taxes compared with the revenue from selling the loan in the secondary market? Assume the tax rate is 40 percent.
b. The investment bank in turn sells the debt at a 6 percent discount to a real estate company planning to build apartment complexes in Argentina. What is the profit after taxes to the investment bank?
c. The real estate company converts this loan into pesos under a debt-for-equity swap organized by the Argentinian government. The official rate for dollar to peso conversion is P1.05/$1. The free market rate is P1.10/$1. How much did the real estate company save by investing in Argentina through the debt-for-equity swap program as opposed to directly investing $200 million using the free market rates?
d. How much would Chase benefit from doing a local currency debt-for-equity swap itself? Why does the bank not do this swap?