The Acme Insurance Company purchased a five-year bond whose interest rate floats with LIBOR. Specifically, the...
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The Acme Insurance Company purchased a five-year bond whose interest rate floats with LIBOR. Specifically, the interest rate in a given year is equal to LIBOR plus 200 basis points. At the same time that the insurance company purchases this bond, it enters into a floor agreement with J.P. Morgan in which the notional principal amount is $35 million with a strike of 6%. The premium Acme Insurance Company agrees to pay J.P. Morgan each year is $300,000. Suppose at the time that it is necessary to determine whether a payment must be made by J.P Morgan, the LIBOR is 9%. How much must Bear Stearns pay Acme Insurance Company? The Acme Insurance Company purchased a five-year bond whose interest rate floats with LIBOR. Specifically, the interest rate in a given year is equal to LIBOR plus 200 basis points. At the same time that the insurance company purchases this bond, it enters into a floor agreement with J.P. Morgan in which the notional principal amount is $35 million with a strike of 6%. The premium Acme Insurance Company agrees to pay J.P. Morgan each year is $300,000. Suppose at the time that it is necessary to determine whether a payment must be made by J.P Morgan, the LIBOR is 9%. How much must Bear Stearns pay Acme Insurance Company?
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Related Book For
Statistics For Business And Economics
ISBN: 9780132745659
8th Edition
Authors: Paul Newbold, William Carlson, Betty Thorne
Posted Date:
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