Question
For this and the next 2 questions. Interest rate swap: Design an interest rate swap for the two firms described below. Achimota Foods wishes to
For this and the next 2 questions. Interest rate swap: Design an interest rate swap for the two firms described below. Achimota Foods wishes to take out a floating interest loan while Tamale Systems would like to issue a fixed rate loan.
| Achimota Foods | Tamale Systems |
Fixed | 15% | 19% |
Floating | Libor + 3% | Libor + 5% |
Suppose the gains are to be divided in the following manner: 80% for Achimota and 20% for Tamale. In order for the swap to be successful, which party should borrow fixed and pay floating?
Achimota should borrow fixed at 15% and pay floating | ||
Tamale should borrow fixed at 15% and pay floating | ||
Achimota should borrow floating at Libor + 3% and pay fixed at 15% | ||
Tamale should borrow fixed at 19% and pay floating |
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Based on the ratios for splitting up the quality swap, how much is the net savings due to Achimota?
1.6%
0.4%
0.5%
1.0%
None of the above
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Describe the swap payments made by each of the parties.
Tamale pays floating rate at Libor + 1.4%; Achimota pays fixed rate loan at 18.6%
Achimota pays floating rate at Libor + 2%; Tamale pays fixed rate loan at 18%
Achimota pays floating rate at Libor + 1.4%; Tamale pays fixed rate loan at 18.6%
None of the above
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