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Question 9. You are a lender and a company asked you to borrow $10 million for 7 years and the company has a AAA credit
Question 9. You are a lender and a company asked you to borrow $10 million for 7 years and the company has a AAA credit rating. The current market interest rate is 5.55% for a loan to a borrower with a AAA credit rating and the company agrees to pay this rate. However, your economists believe that the market interest rate will increase sometime in the next three years. The increase they expect is somewhere in the range of an additional 4% to 6% given the expect macro environment. a) You should not make the loan and hope your economists are right and you could get a higher interest rate if they are correct in their expectations. b) You should tell the borrower that the interest rate will go up in a couple of years so you will split the difference between a 4% and 6% increase and make the loan at 10.55%. c) You should make the loan at the current market rate but include a call provision in the loan. d) You should make the loan at the current market rate but include a put provision in the loan. e) Only (a) and (c). f) None of the above. Answer 9: Question 10. Statement: In the secondary market, there is an inverse relationship between the price of a bond at any particular time and the current interest rate. a) The statement is true. b) The statement is false. c) The statement in neither true nor false because it depends on the par value of the bond. d) This statement can be explained mathematically and practically. e) Only (a) and (d). f) None of the above
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