answer questions from week 2. show your work for problems

Chapter 8 1. Reference Rates. What is an interest \"reference rate\" and how is it used to set rates for individual borrowers? 2. Credit Risk Premium. What is a credit risk premium? 6. Investment Grade versus Speculative Grade. What do the general categories of investment grade and speculative grade represent? 14. LIBOR Flat. Why do fixed-for-floating interest rate swaps never swap the credit spread component on a floating-rate loan? 1. U.S. Treasury Bill Auction RatesMarch 2009. The interest yields on U.S. Treasury securities in early 2009 fell to very low levels as a result of the combined events surrounding the global financial crisis. Calculate the simple and annualized yields for the 3-month and 6-month Treasury bills auctioned on March 9, 2009, listed here. 3-Month T-Bill Treasury bill, face value $10,000.00 Price at sale $9,993.93 Discount 6-Month T-Bill $10,000.00 $9,976.74 $6.07 $23.26 9. Delos Debt Renegotiations (A). Delos borrowed 80 million two years ago. The loan agreement, an amortizing loan, was for six years at 8.625% interest per annum. Delos has successfully completed two years of debt-service, but now wishes to renegotiate the terms of the loan with the lender to reduce its annual payments. a. What were Delos's annual principal and interest payments under the original loan agreement? b. After two years debt service, how much of the principal is still outstanding? c. If the loan were restructured to extend another two years, what would the annual payments principal and interestbe? Is this a significant reduction from the original agreement's annual payments? 16. Falcor. Falcor is the U.S.-based automotive parts supplier that was spun-off from General Motors in 2000. With annual sales of over $26 billion, the company has expanded its markets far beyond traditional automobile manufacturers in the pursuit of a more diversified sales base. As part of the general diversification effort, the company wishes to diversify the currency of denomination of its debt portfolio as well. Assume Falcor enters into a $50 million 7-year cross-currency interest rate swap to do just thatpay euros and receive dollars. Using the data in Exhibit 8.12, solve the following: a. Calculate all principal and interest payments in both currencies for the life of the swap. b. Assume that three years later Falcor decides to unwind the swap agreement. If 4-year fixed rates of interest in euros have now risen to 5.35%, 4-year fixed rate dollars have fallen to 4.40%, and the current spot exchange rate is $1.02/, what is the net present value of the swap agreement? Explain the payment obligations of the two parties precisely. Chapter 9 4. Supply and Demand. Which of the three major theoretical approaches seems to put the most weight into arguments on the supply and demand for currency? What is its primary weakness? 10. Intervention Downside. What is the downside of both direct and indirect intervention? 4. Turkish Lira Devaluation. The Turkish lira (TL) was officially devalued by the Turkish government in February 2001 during a severe political and economic crisis. The Turkish government announced on February 21 that the lira would be devalued by 20%. The spot exchange rate on February 20 was TL68,000/$. a. What was the exchange rate after devaluation? b. What was percentage change after falling to TL100,000/$? 10. BP and Rosneft 2015. BP (UK) and Rosneft (Russia) had severed a long-term joint venture in 2013, with Rosneft buying BP out with $55 billion in cash and a 20% interest (equity interest) in Rosneft itself. Rosneft financed a large part of the buyout by borrowing heavily. The following year, in July 2014, BP received a dividend on its ownership interest in Rosneft of RUB24 billion. But Rosneft's performance had been declining, as was the Russian ruble. The winter of 2014-2015 in Europe was a relatively mild one, and Europe's purchases of Rosneft's natural gas had fallen as had the price of natural gas. Rosneft's total sales were down, and the ruble had clearly fallen dramatically (table above). And to add debt to injury, Rosneft was due to make a payment of USD19.5 billion in 2015 on its debt from the BP buyout. a. Assuming a spot rate of RUB34.78 = USD1.00 in July 2014, how much was the dividend paid to BP in U.S. dollars? b. If Rosneft were to pay the same dividend to BP in July 2015, and the spot rate at that time was RUB75 = 1.00USD, what would BP receive in U.S. dollars? c. If the combination of Western sanctions against Russia and lower global oil prices truly sent the Russian economy into recession, and the spot rate was RUB75 = 1.00USD in July 2015, what might BP's dividend be in July 2015? 11. Current Spot Rates. What are the current spot exchange rates for the following cross rates? a. Japanese yen/U.S. dollar exchange rate b. Japanese yen/Australian dollar exchange rate c. Australian dollar/U.S. dollar exchange rate 12. Purchasing Power Parity Forecasts. Assuming purchasing power parity, and assuming that the forecasted change in consumer prices is a good proxy of predicted inflation, forecast the following cross rates: a. Japanese yen/U.S. dollar in one year b. Japanese yen/Australian dollar in one year c. Australian dollar/U.S. dollar in one year 13. International Fischer Forecasts. Assuming International Fischer applies to the coming year, forecast the following future spot exchange rates using the government bond rates for the respective country currencies: a. Japanese yen/U.S. dollar in one year b. Japanese yen/Australian dollar in one year c. Australian dollar/U.S. dollar in one year 14. Implied Real Interest Rates. If the nominal interest rate is the government bond rate, and the current change in consumer prices is used as expected inflation, calculate the implied \"real\" rates of interest by currency. a. Australian dollar \"real\" rate b. Japanese yen \"real\" rate c. U.S. dollar \"real\" rate 15. Forward Rates. Using the spot rates and 3-month interest rates above, calculate the 90-day forward rates for: a. Japanese yen/U.S. dollar exchange rate b. Japanese yen/Australian dollar exchange rate c. Australian dollar/U.S. dollar exchange rate Chapter 8 1. Reference Rates. What is an interest \"reference rate\" and how is it used to set rates for individual borrowers? An interest rate benchmark upon which a floating-rate security or interest rate swap is based. The reference rate will be a moving index such as LIBOR, the prime rate or the rate on benchmark U.S. Treasuries. It is used as an inflation benchmark (such as the Consumer Price Index) or a measure of economic health (such as unemployment rates or corporate default rates) 2. Credit Risk Premium. What is a credit risk premium? It is the return in excess of the risk-free rate of return an investment is expected to yield; an asset's risk premium is a form of compensation for investors who tolerate the extra risk, compared to that of a risk-free asset, in a given investment. 6. Investment Grade versus Speculative Grade. What do the general categories of investment grade and speculative grade represent? It represents a low risk of a credit default, making it an attractive investment vehicle. 14. LIBOR Flat. Why do fixed-for-floating interest rate swaps never swap the credit spread component on a floating-rate loan? Because swap spread can be also be driven by short-term supply and demand fundamentals and other factors within the swap market, the overall level of swap spreads across maturities can also offer a broad reading of the creditworthiness of the major banks that provide swaps. 1. U.S. Treasury Bill Auction RatesMarch 2009. The interest yields on U.S. Treasury securities in early 2009 fell to very low levels as a result of the combined events surrounding the global financial crisis. Calculate the simple and annualized yields for the 3-month and 6-month Treasury bills auctioned on March 9, 2009, listed here. 3-Month T-Bill 6-Month T-Bill Treasury bill, face value $10,000.00 $10,000.00 Price at sale $9,993.93 $9,976.74 Discount $6.07 $23.26 Simple and annualized yields for 3 months = ($10,000.00*$9,993.93)* $6.07 =$ 606,631,551.00 ` Simple and annualized yields for 6 months = ($10,000.00*$9,976.74)* $23.26 =$2,320,589,724 9. Delos Debt Renegotiations (A). Delos borrowed 80 million two years ago. The loan agreement, an amortizing loan, was for six years at 8.625% interest per annum. Delos has successfully completed two years of debt-service, but now wishes to renegotiate the terms of the loan with the lender to reduce its annual payments. a. What were Delos's annual principal and interest payments under the original loan agreement? Annual principal = 80 million / (1+0.08625)6 = 2.333 million Interest payment is given by , = 2.336 million / (1+r)6 = 12.25% b. After two years debt service, how much of the principal is still outstanding? Principal outstanding = 80 million- 62 million / (1+0.08625)6 = 36 million c. If the loan were restructured to extend another two years, what would the annual payments principal and interestbe? Is this a significant reduction from the original agreement's annual payments? Annual principal = 80 million / (1+0.08625)2 = 6.4 million This is not a significant reduction from the original agreement's annual payments. 16. Falcor. Falcor is the U.S.-based automotive parts supplier that was spun-off from General Motors in 2000. With annual sales of over $26 billion, the company has expanded its markets far beyond traditional automobile manufacturers in the pursuit of a more diversified sales base. As part of the general diversification effort, the company wishes to diversify the currency of denomination of its debt portfolio as well. Assume Falcor enters into a $50 million 7-year cross- currency interest rate swap to do just thatpay euros and receive dollars. Using the data in Exhibit 8.12, solve the following: a. Calculate all principal and interest payments in both currencies for the life of the swap. Principal payments = $ 50 million / (1+0.06)7 = $3.6 million b. Assume that three years later Falcor decides to unwind the swap agreement. If 4-year fixed rates of interest in euros have now risen to 5.35%, 4-year fixed rate dollars have fallen to 4.40%, and the current spot exchange rate is $1.02/, what is the net present value of the swap agreement? Explain the payment obligations of the two parties precisely. Net present Value = $ 50 million / (1+0.0535)4 * $1.02/ = $ 5.25 million Chapter 9 4. Supply and Demand. Which of the three major theoretical approaches seems to put the most weight into arguments on the supply and demand for currency? What is its primary weakness? 1. Price changes 2. Interest rates 3. Flotation rates The problem is that supply and demand aren't independent variables interacting, they represent a symbiotic relationship where each is absolutely dependent on the other. Disruption of one automatically disrupts the other 10. Intervention Downside. What is the downside of both direct and indirect intervention? This involves desiring to decrease the exchange rate/price of domestic currency without changing the monetary base, authorities purchase foreign-currency bonds, the same action as in the last section. After this action, in order to keep the monetary base, governments conduct a new transaction, selling an equal amount of domestic-currency bonds, so that the total money supply is back to the original level. 4. Turkish Lira Devaluation. The Turkish lira (TL) was officially devalued by the Turkish government in February 2001 during a severe political and economic crisis. The Turkish government announced on February 21 that the lira would be devalued by 20%. The spot exchange rate on February 20 was TL68,000/$. a. What was the exchange rate after devaluation? = TL68,000/$ * (100% - 20%) = $ 54,400 b. What was percentage change after falling to TL100,000/$? = TL68,000/$/ TL100,000/$ *100% = 68% 10. BP and Rosneft 2015. BP (UK) and Rosneft (Russia) had severed a long-term joint venture in 2013, with Rosneft buying BP out with $55 billion in cash and a 20% interest (equity interest) in Rosneft itself. Rosneftfinanced a large part of the buyout by borrowing heavily. The following year, in July 2014, BP received a dividend on its ownership interest in Rosneft of RUB24 billion. But Rosneft's performance had been declining, as was the Russian ruble. The winter of 2014-2015 in Europe was a relatively mild one, and Europe's purchases of Rosneft's natural gas had fallen as had the price of natural gas. Rosneft's total sales were down, and the ruble had clearly fallen dramatically (table above). And to add debt to injury, Rosneft was due to make a payment of USD19.5 billion in 2015 on its debt from the BP buyout. a. Assuming a spot rate of RUB34.78 = USD1.00 in July 2014, how much was the dividend paid to BP in U.S. dollars? Divided paid to BP = RUB34.78 * $55 = $1912.9 b. If Rosneft were to pay the same dividend to BP in July 2015, and the spot rate at that time was RUB75 = 1.00USD, what would BP receive in U.S. dollars? Divided paid to BP = RUB75 * USD19.5 billion = $1462.5 Billion c. If the combination of Western sanctions against Russia and lower global oil prices truly sent the Russian economy into recession, and the spot rate was RUB75 = 1.00USD in July 2015, what might BP's dividend be in July 2015? BPs Dividend = RUB24 billion/ RUB75 = $ 32 million 11. Current Spot Rates. What are the current spot exchange rates for the following cross rates? a. Japanese yen/U.S. dollar exchange rate = 117 b. Japanese yen/Australian dollar exchange rate =100 c. Australian dollar/U.S. dollar exchange rate = 112 12. Purchasing Power Parity Forecasts. Assuming purchasing power parity, and assuming that the forecasted Change in consumer prices is a good proxy of predicted inflation, forecast the following cross rates: a. Japanese yen/U.S. dollar in one year =115 b. Japanese yen/Australian dollar in one year = 130 c. Australian dollar/U.S. dollar in one year = 108 13. International Fischer Forecasts. Assuming International Fischer applies to the coming year, forecast the Following future spot exchange rates using the government bond rates for the respective country currencies: a. Japanese yen/U.S. dollar in one year = 89 b. Japanese yen/Australian dollar in one year = 92 c. Australian dollar/U.S. dollar in one year = 87 14. Implied Real Interest Rates. If the nominal interest rate is the government bond rate, and the current change in consumer prices is used as expected inflation,calculate the implied \"real\" rates of interest bycurrency. a. Australian dollar \"real\" rate = 117/90 *4.2% = 5.46% b. Japanese yen \"real\" rate = 110/90 *3.8% =4.644% c. U.S. dollar \"real\" rate == 112/90 *4.7% = 0.585% 15. Forward Rates. Using the spot rates and 3-month interest rates above, calculate the 90-day forward rates for: a. Japanese yen/U.S. dollar exchange rate Forward rates = 117/90 =1.3% b. Japanese yen/Australian dollar exchange rate = 100/90 = 1.1% c. Australian dollar/U.S. dollar exchange rate = 112/90 = 1.244%