Project #20144 - Finance

3. Assume that AA-rated Axion International can issue 5-year $20 million in bonds at a fixed rate of

8% or LIBOR + 3%. Similarly, A-rated Rand Inc. can issue the same amount of bonds at a fixed rate of 13% or Libor + 6%. Axion would like to borrow at floating (variable) rates while Rand would like to borrow at fixed rates. Assume exchange rate of SF1.5/$.

3a: Arrange a fixed-to-floating swap such that the intermediary makes 20 bp and the rest is equally shared by both companies. Show the gains to each party.

3b.  Assume Rand Inc. also has the option to issued Swiss-franc denominated bonds at a fixed rate of 9% (in addition to 13% at home). Axel SA, a Swiss company, can issue fixed-rate bonds in Switzerland at 9.5% and fixed-rate dollar-denominated bonds at 12.5%. An intermediary offers to arrange a swap where each company issues bond in the other currency and pays in its own currency. Show the rates and savings available to each company if the intermediary keeps 20 bp for itself. Should Rand choose the fixed-floating swap in question (3a) or the cross-currency swap in (3b)? 

Subject Mathematics
Due By (Pacific Time) 12/18/2013 12:00 am
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