Question
Suppose that Dummy Ltd. can invest $100mil long-term at a return of 8% p.a. and Intelligent Ltd. can invest $100mil short-term at a return equal
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Suppose that Dummy Ltd. can invest $100mil long-term at a return of 8% p.a. and Intelligent Ltd. can invest $100mil short-term at a return equal to the 6-month LIBOR rate plus a spread of 100 bps. Both companies agree to enter into an interest rate swap agreement whereby Dummy Ltd. receives the LIBOR rate plus 50 bps. from Intelligent Ltd., and Intelligent Ltd. received 8.5% p.a. fixed from Dummy Ltd. What is the net return to each company?
A. Net return to Dummy Ltd. = LIBOR rate + 100 bps. Net return to Intelligent Ltd. = 9% p.a.
B. Net return to Dummy Ltd. = 9% p.a. Net return to Intelligent Ltd. = LIBOR rate.
C. Net return to Dummy Ltd. = LIBOR rate. Net return to Intelligent Ltd. = 9% p.a
D. Net return to Dummy Ltd. = LIBOR rate. Net return to Intelligent Ltd. = 8% p.a.
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Public Finance
Authors: Harvey Rosen
6th International Edition
0071121234, 978-0071121231
