Question

1.1. A companys investments earn LIBOR minus 0.5%.

Table1: Bid and offer rates in swap market and swap rates (percent per annum)

Use Table 1 to explain how the company can use the quoted rates to convert the investments to (a) Three-year fixed rate investment (b) Five --year fixed-rate investments. (c) The company also borrowed money at 5.1% for seven years and wishes to convert this borrowing to a floating-rate liability by making use of the swap quotes in table 1, explain how this can be done.

Bid Maturity (years) 2 3 4 5 7 10 6.03 6.21 6.35 6.47 6.65 6.83 Offer 6.06 6.24 6.39 6.51 6.68 6.87 Swap rate 6.045 6.225 6.370 6.490 6.665 6.850 Bid Maturity (years) 2 3 4 5 7 10 6.03 6.21 6.35 6.47 6.65 6.83 Offer 6.06 6.24 6.39 6.51 6.68 6.87 Swap rate 6.045 6.225 6.370 6.490 6.665 6.850