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04 Module Untitled RM704 Module R-Squared vs. Untitled www.campus Untitled www.campus Now suppose that the cyclical behavior of the municipality's net cash flow exposes its
04 Module Untitled RM704 Module R-Squared vs. Untitled www.campus Untitled www.campus Now suppose that the cyclical behavior of the municipality's net cash flow exposes its bondholders to credit risk. Presently, the municipality has $1 billion of debt outstanding on which it pays an average annual interest rate of 6% this reflects a premium for the credit risk. Ratings agencies have told the municipality that if they could remove the cyclically-induced credit risk, they could reduce their borrowing costs by 40 basis points (i.e., 0.40%) a year. How much would they save annually if they can remove the cyclicality of their net cash flows? You plan to charge the municipality a retainer of $75,000 per year for your firm's services. Are you worth it? onus Question: Structure a GDP swap to hedge the municipality's GDP exposure. Draw a diagram similar to Exhibit 13.5 in the class reading. Assume the fixed rate would be 2% paid in full quarterly. Assume the GDP leg would be the annual growth rate of GDP, but paid in full quarterly. I 04 Module Untitled RM704 Module R-Squared vs. Untitled www.campus Untitled www.campus Now suppose that the cyclical behavior of the municipality's net cash flow exposes its bondholders to credit risk. Presently, the municipality has $1 billion of debt outstanding on which it pays an average annual interest rate of 6% this reflects a premium for the credit risk. Ratings agencies have told the municipality that if they could remove the cyclically-induced credit risk, they could reduce their borrowing costs by 40 basis points (i.e., 0.40%) a year. How much would they save annually if they can remove the cyclicality of their net cash flows? You plan to charge the municipality a retainer of $75,000 per year for your firm's services. Are you worth it? onus Question: Structure a GDP swap to hedge the municipality's GDP exposure. Draw a diagram similar to Exhibit 13.5 in the class reading. Assume the fixed rate would be 2% paid in full quarterly. Assume the GDP leg would be the annual growth rate of GDP, but paid in full quarterly
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