FIN 4604 FINAL EXAM QUESTIONS. ALL EXAM REVISION QUESTIONS AND
CORRECT ANSWERS (ALREADY GRADED A+) (2024 UPDATE)
A swap bank proposes the following interest only swap: X will pay the swap bank annual payments
on $10,000,000 with the coupon rate of LIBOR − 0.15 percent; in exchange the swap bank will
pay to company X interest payments on $10,000,000 at a fixed rate of 9.90 percent. Y will pay the
swap bank interest payments on $10,000,000 at a fixed rate of 10.30 percent and the swap bank
will pay Y annual payments on $10,000,000 with the coupon rate of LIBOR − 0.15 percent.
<--10% [X]LIBOR-.15%->[SB]LIBOR-.15%->[Y]->1.5%
<-------9.90%. <---- 10.30%
What is the value of this swap to the swap bank?
-The swap bank will lose money on the deal.
-The swap bank - ANSWER- -The swap bank will earn 40 basis points per year on $10,000,000
= $40,000 per year.
(LIBOR − 0.15%) − (LIBOR − 0.15%) + 10.3% − 9.9% = 0.4%, or 40 basis points.
Company X wants to borrow $10,000,000 floating for 5 years; company Y wants to borrow
$10,000,000 fixed for 5 years. Their external borrowing opportunities are shown here:
Fixed-Rate Floating-Rate Borrowing Cost Borrowing CostCompany X10% LIBORCompany
Y12% LIBOR + 1.5%
A swap bank proposes the following interest only swap:X will pay the swap bank annual payments
on $10,000,000 with the coupon rate of LIBOR − 0.15 percent; in exchange the swap bank will
pay to company X interest payments on $10,000,000 at a fixed rate of 9.90 percent. Y will pay the
,swap bank interest payments on $10,000,000 at a fixed rate of 10.30 percent and the swap bank
will pay Y annual payments on $10,000,000 with the coupon rate of LIBOR − 0.15 percent.
<--10% [X]LIBOR-.15%->[SB]LIBOR-.15%->[Y]->1.5%
<-------10.05%. <---- 10.30%
What is the value of this swap to the swap bank?
-The swap bank will earn 40 basis points per year on $10,0 - ANSWER- -The swap bank will
earn 40 basis points per year on $10,000,000 = $40,000 per year.
(LIBOR − 0.15%) − LIBOR +10.05% − 10.30% = 0.4%, or 40 basis points.
Company X wants to borrow $10,000,000 floating for 5 years; company Y wants to borrow
$10,000,000 fixed for 5 years. Their external borrowing opportunities are shown here:
Fixed-Rate Floating-Rate
Company X (10%)
Company Y (12%)
Borrowing Cost Borrowing Cost
Company X Libor
Company Y Libor + 1.5%
A swap bank is involved and quotes the following for five-year dollar interest rate swaps: 10.05
percent−10.45 percent against LIBOR flat.
<--A% [X]B------->[SB]C--->[Y]----->F
,<-------E. <---- D
Assume both X and Y agree to the swap bank's terms. Fill in the values for A, B, C, D, E, & F on
the diagram.
-A = LIBOR; B = 10.45%; C = 10.05%; D = LIBOR; E = LIBOR; F = 12%
-A = 10%; B = 10.45%; C = 10.05%; D = LIBOR; E = LIBOR; F = LIBOR + 1½%
-A = 10%; B = 10.45%; C = LIBOR; D = LIBOR; E = 10.05%; F = LIBOR + 1½%
-A = 10%; B = LIBOR; C = LIBOR; D = 10.45%; E = 10.05%; F = LIBOR + 1½% - ANSWER-
-A = 10%; B = LIBOR; C = LIBOR; D = 10.45%; E = 10.05%; F = LIBOR + 1½%
Company X wants to borrow $10,000,000 floating for 5 years; company Y wants to borrow
$10,000,000 fixed for 5 years. Their external borrowing opportunities are shown here:
Fixed-Rate Floating-Rate
Company X (10%)
Company Y (12%)
Borrowing Cost Borrowing Cost
Company X Libor
Company Y Libor + 1.5%
Up arrow [A]
[x]<---------[b]----[Y]
--------->[c]--- Down arrow [D]
, a) A = 10%; B = 11.75%; C = LIBOR - .25%; D = LIBOR + 1.5%
b) A = 10%; B = 10%; C = LIBOR - .25%; D = LIBOR + 1.5%
c) A = LIBOR; B = 10%; C = LIBOR - .25%; D = 12%
d) A = LIBOR; B = LIBOR; C = LIBOR - .25%; D = 12% - ANSWER- b) A = 10%; B = 10%;
C = LIBOR - .25%; D = LIBOR + 1.5%
Grecian Tile Manufacturing of Athens, Georgia, borrows $1,500,000 at LIBOR plus a lending
margin of 1.26 percent per annum on a six-month rollover basis from a London bank. If six-month
LIBOR is 4.55 percent over the first six-month interval and 5.380 percent over the second six-
month interval, how much will Grecian Tile pay in interest over the first year of its Eurodollar
loan? (Do not round intermediate calculations. Round your answer to 2 decimal places.) -
ANSWER- Interest: $93,375.00
$1,500,000 × (.0455 + .0126)/2 + $1,500,000 × (.05380 + .0126)/2 = $43,575 + $49,800.00 =
$93,375.00.
A bank sells a "three against six" $3,000,000 FRA for a three-month period beginning three months
from today and ending six months from today. The purpose of the FRA is to cover the interest rate
risk caused by the maturity mismatch from having made a three-month Eurodollar loan and having
accepted a six-month Eurodollar deposit. The agreement rate with the buyer is 5.51 percent. There
are actually 92 days in the three-month FRA period. Assume that three months from today the
settlement rate is 4.880 percent. Determine how much the FRA is worth and who pays who—the
buyer pays the seller or the seller pays the buyer. (Do not round intermediate calculations. Round
