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Large financial institutions act as market makers for swaps. This means that they are ready to make fixed interest payments (called bid) and receive floating
Large financial institutions act as market makers for swaps. This means that they are ready to make fixed interest payments (called bid) and receive floating interest payments (LIBOR), and also receive fixed interest payments (called offer) and make floating interest payments. Using the bid and offer rates below, answer the following question.
Maturity (years) | Bid | Offer |
2 | 7.12% | 7.15% |
3 | 7.21% | 7.26% |
5 | 7.32% | 7.39% |
- Using a swap, a 5-year floating rate loan of LIBOR + 10 basis points can be converted to a ______ fixed rate loan, and a 3-year floating rate investment of LIBOR + 7 basis points can be converted to a ______ fixed rate investment.
- 7.38%
- 7.40%
- 7.40%
- 7.49%
- 7.51%
- Use the table for the swap rates to answer this question. A 3-year floating rate investment of LIBOR + 7 basis points can be converted to a ______ fixed rate investment.
- 7.33%
- 7.31%
- 7.26%
- 7.28%
- 7.30%
- AAA Corp. can borrow at a fixed rate of 5.0% and at a floating rate of LIBOR plus 40 basis points. BBB Cop. can borrow at a fixed rate of 5.8% and at a floating rate of LIBOR plus 90 basis points. AAA Corp. wants a floating rate loan and BBB Corp. wants a fixed rate loan. The two companies agree to enter into a swap whereby AAA pays LIBOR and BBB pays fixed. The swap rates should lie in which of the following intervals so that both companies benefit from the swap?
- Between 4.6% and 4.9%
- Between 5.5% and 5.7%
- Between 4.4% and 4.7%
- Between 5.5% and 5.9%
- None of the above
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