Company A holds two bonds:

A 10 year $5m bond paying fixed annual coupons of 4% issued by company B

A 20 year 10m bond paying semi-annual coupons at Libor+50bp issued by company C.

Answer the questions below. In each case begin by briefly describing any instrument you discuss, and how it works in practice. Use appropriate terminology and diagrams to aid your answers.

(a) Company A fears that short term interest rates might fall over the next five years, but is not certain that they will. Suggest an instrument that company A could use to protect itself from this market risk. Provide specific details for your chosen instrument.

(b) Company B is reported to be experiencing cash flow problems. Suggest an instrument that company A could use to protect itself from this counterparty risk. Provide specific details for your chosen instrument.

(c)Company A would like to have certainty for its cash flows beyond 10 years, but does not want to alter its cash flow profile for the next ten years. Suggest an instrument that company A could use to achieve this goal. Provide specific details for your chosen instrument