16
48. In convertible bonds, the value of the common stock price upon immediate conversion is the
a.
Put-call parity price.
b.
Conversion parity price.
c.
Cash equivalent price.
d.
Convertible price.
e.
Redemption price.
Exhibit 14-4
USE THE FOLLOWING INFORMATION FOR THE NEXT PROBLEM(S)
A company buys an interest rate cap that pays the difference between LIBOR and 8% if LIBOR
exceeds 8%. Current LIBOR is 7%. The amount of the option is $2,500,000, and the settlement is
every 6 months. Assume a 360 day year.
49. Refer to Exhibit 14-4. Find the payoff if LIBOR closes at 7.8%.
a.
$0.00
b.
$25,000.00
c.
$50,000.00
d.
−$25,000.00
e.
−$50,000.00
50. Refer to Exhibit 14-4. Find the payoff if LIBOR closes at 8.2%.
a.
$0.00
b.
$25,000.00
c.
$50,000.00
d.
−$25,000.00
e.
−$50,000.00
17
Exhibit 14-5
USE THE FOLLOWING INFORMATION FOR THE NEXT PROBLEM(S)
Darden Industries has decided to borrow $25,000,000.00 for six months in two three-month issues. As
the Treasurer, you are concerned that interest rates will rise over the next three months and the rate
upon which the second payment will be based will be undesirable. (The amount of Darden’s first
payment will be known at origination.) To reduce the company’s interest rate exposure, you decide to
purchase a 3 6 FRA whereby you pay the dealer’s quoted fixed rate of 4.5% in exchange for
receiving 3-month LIBOR at the settlement date. In order to hedge her exposure, the dealer buys
LIBOR from McIntire Industries at its bid rate of 4%. (Assume a notional principal of $25,000,000.00
and that there are 60 days between month 3 and month 6.)
51. Refer to Exhibit 14-5. Assuming that 3-month LIBOR is 5.00% on the rate determination day, and the
contract specified settlement in arrears at month 6, describe the transaction that occurs between the
dealer and Darden.
a.
The dealer is obligated to pay Darden $19,500
b.
The dealer is obligated to pay Darden $31,250
c.
Darden is obligated to pay the dealer $19,500
d.
Darden is obligated to pay the dealer $31,250
e.
None of the above
52. Refer to Exhibit 14-5. Assuming that 3-month LIBOR is 5.00% on the rate determination day, and the
contract specified settlement in advance, describe the transaction that occurs between the dealer and
Darden.
a.
The dealer is obligated to pay Darden $30,864.20.
b.
The dealer is obligated to pay Darden $19,359.61.
c.
Darden is obligated to pay the dealer $19,359.61.
d.
Darden is obligated to pay the dealer $30,864.20.
e.
None of the above
18
53. Refer to Exhibit 14-5. Assuming that 3-month LIBOR is 5.00% on the rate determination day, and the
contract specified settlement in arrears at month 6, describe the transaction that occurs between the
dealer and McIntire.
a.
The dealer is obligated to pay McIntire $62,500
b.
The dealer is obligated to pay McIntire $57,500
c.
McIntire is obligated to pay the dealer $62,500
d.
McIntire is obligated to pay the dealer $57,500
e.
None of the above
54. Refer to Exhibit 14-5. Assuming that 3-month LIBOR is 5.00% on the rate determination day, and the
contract specified settlement in advance, describe the transaction that occurs between the dealer and
McIntire.
a.
The dealer is obligated to pay McIntire $61,728.40.
b.
The dealer is obligated to pay McIntire $56,389.16.
c.
McIntire is obligated to pay the dealer $56,389.16.
d.
McIntire is obligated to pay the dealer $61,728.40.
e.
None of the above
55. Refer to Exhibit 14-5. How much compensation does the dealer receive for transaction costs, credit
risk and other costs associated with matching the FRA’s?
a.
$31,250
b.
$21,350
c.
$41,000
d.
$48,150
e.
None of the above
19
Exhibit 14-6
USE THE FOLLOWING INFORMATION FOR THE NEXT PROBLEM(S)
Chimichango Industries has decided to borrow $50,000,000.00 for six months in two three-month
issues. As the Treasurer, you are concerned that interest rates will rise over the next three months and
the rate upon which the second payment will be based will be undesirable. (The amount of
Chimichango’s first payment will be known at origination.) To reduce the company’s interest rate
exposure, you decide to purchase a 3 6 FRA whereby you pay the dealer’s quoted fixed rate of 5.91%
in exchange for receiving 3-month LIBOR at the settlement date. In order to hedge her exposure, the
dealer buys LIBOR from Megabuks Industries at its bid rate of 5.85%. (Assume a notional principal of
$50,000,000.00 and that there are 60 days between month 3 and month 6.)
56. Refer to Exhibit 14-6. Assuming that 3-month LIBOR is 5.6% on the rate determination day, and the
contract specified settlement in arrears at month 6, describe the transaction that occurs between the
dealer and Chimichango.
a.
The dealer is obligated to pay Chimichango $38,750.
b.
The dealer is obligated to pay Chimichango $31,250.
c.
Chimichango is obligated to pay the dealer $38,750.
d.
Chimichango is obligated to pay the dealer $31,250.
e.
None of the above.
57. Refer to Exhibit 14-6. Assuming that 3-month LIBOR is 5.6% on the rate determination day, and the
contract specified settlement in advance, describe the transaction that occurs between the dealer and
Chimichango.
a.
The dealer is obligated to pay Chimichango $38,215.00
b.
The dealer is obligated to pay Chimichango $30,818.54.
c.
Chimichango is obligated to pay the dealer $31,818.54.
d.
Chimichango is obligated to pay the dealer $38,215.00
e.
None of the above.
58. Refer to Exhibit 14-6. Assuming that 3-month LIBOR is 5.6% on the rate determination day, and the
contract specified settlement in arrears at month 6, describe the transaction that occurs between the
dealer and Megabuks.
a.
The dealer is obligated to pay Megabuks $38,750.
b.
The dealer is obligated to pay Megabuks $31,250.
c.
Megabuks is obligated to pay the dealer $38,750.
d.
Megabuks is obligated to pay the dealer $31,250.
e.
None of the above.
20
59. Refer to Exhibit 14-6. Assuming that 3-month LIBOR is 5.6% on the rate determination day, and the
contract specified settlement in advance, describe the transaction that occurs between the dealer and
Megabuks.
a.
The dealer is obligated to pay Megabuks $38,215.00
b.
Megabuks is obligated to pay the dealer $31,818. 54.
c.
Megabuks is obligated to pay the dealer $38,215.00
d.
The dealer is obligated to pay Megabuks $30,818.54.
e.
None of the above
60. Refer to Exhibit 14-6. How much compensation does the dealer receive for transaction costs, credit
risk and other costs associated with matching the FRA’s?
a.
$30,000
b.
$31,250
c.
$7,500
d.
$5,000
e.
None of the above
21
Exhibit 14-7
USE THE FOLLOWING INFORMATION FOR THE NEXT PROBLEM(S)
Black Gold Industries (BGI) is an independent oil producer with production capacity of 500,000
barrels per month. Due to the cost structure of the business, BGI needs to receive $56.50 per barrel in
order to remain solvent. On the other side of this situation is Petrochemicals Unlimited (PU) which
uses an average of 500,000 barrels of West Texas crude oil in its normal production operations. The
nature of PU’s business is such that they will financially suffer if they have to pay more than an
average of $57.80 per barrel for oil over the next six years. To hedge against their exposure to volatile
oil prices, BI and PU contact a swap dealer to arrange the six-year oil swap described below:
−
Settlement is made monthly.
−
The notional principal is for 500,000 barrels per month.
−
The monthly WTI index value is determined as the average of the daily settlement prices
for the crude oil futures contract traded on the New York Mercantile Exchange
(NYMEX).
−
The swap dealer pays BGI $57.00 per barrel.
−
BGI pays the swap dealer the average NYMEX Oil futures price per barrel.
−
PU pays the swap dealer $57.50 per barrel.
−
The swap dealer pays PU dealer the average NYMEX Oil futures price per barrel.
61. Refer to Exhibit 14-7. Describe the transaction that occurs between BGI and the swap dealer if the
monthly average oil futures settlement price is $58.45.
a.
BGI pays the swap dealer $725,000
b.
The swap dealer pays BGI $725,000
c.
BGI pays the swap dealer $675,000
d.
The swap dealer pays BGI $675,000
e.
None of the above.
62. Refer to Exhibit 14-7. Describe the transaction that occurs between PU and the swap dealer if the
monthly average oil futures settlement price is $58.45.
a.
PU pays the swap dealer $725,000
b.
The swap dealer pays PU $725,000
c.
PU pays the swap dealer $475,000
d.
The swap dealer pays PU $475,000
e.
None of the above.
22
63. Refer to Exhibit 14-7. Describe the transaction that occurs between BGI and the swap dealer if the
monthly average oil futures settlement price is $55.50.
a.
BGI pays the swap dealer $750,000
b.
The swap dealer pays BGI $800,000
c.
BGI pays the swap dealer $800,000
d.
The swap dealer pays BGI $750,000
e.
None of the above.
64. Refer to Exhibit 14-7. Describe the transaction that occurs between PU and the swap dealer if the
monthly average oil futures settlement price is $55.50.
a.
PU pays the swap dealer $850,000
b.
The swap dealer pays PU $1,000,000
c.
PU pays the swap dealer $1,000,000
d.
The swap dealer pays PU $850,000
e.
None of the above.
65. Refer to Exhibit 14-7. Barring default by PU or BGI, how much compensation does the swap dealer
receive each month?
a.
$150,000
b.
$210,000
c.
$175,000
d.
$250,000
e.
None of the above
23
Exhibit 14-8
USE THE FOLLOWING INFORMATION FOR THE NEXT PROBLEM(S)
Exclusive Industries has debentures outstanding (par value $1,000.00) convertible into exclusive’s
common stock at $30. The coupon rate is 11% payable semiannually and they mature in 10 years.
66. Refer to Exhibit 14-8. Calculate the conversion value if the stock price is $24.00 par share.
a.
$600.00
b.
$700.00
c.
$800.00
d.
$900.00
e.
$1,000.00
67. Refer to Exhibit 14-8. Calculate the straight-bond value assuming that bonds of equivalent risk and
maturity are yielding 13% per year compounded semiannually.
a.
$942.65
b.
$902.65
c.
$889.82
d.
$796.83
e.
$757.37
Exhibit 14-9
USE THE FOLLOWING INFORMATION FOR THE NEXT PROBLEM(S)
BioTech Industries has debentures outstanding (par value $1,000) convertible into the company’s
common stock at $30. The coupon rate is 11% payable semiannually and they mature in 10 years.
68. Refer to Exhibit 14-9. Calculate the conversion value of the bond if the stock price is $27.00 per share.
a.
$600.00
b.
$700.00
c.
$800.00
d.
$900.00
e.
$1,000.00
24
69. Refer to Exhibit 14-9. Calculate the straight-bond value assuming that bonds of equivalent risk and
maturity are yielding 14% per year compounded semiannually.
a.
$757.37
b.
$796.83
c.
$841.07
d.
$889.82
e.
$902.65
70. Refer to Exhibit 14-9. At present, what would be the minimum value of the bond?
a.
$600.00
b.
$796.83
c.
$889.82
d.
$900.00
e.
$1000.00
71. The common stock of BioTech Industries pays a dividend of $1 per share and has a current market
price of $27 per share. The convertible bond is selling for $1100. The payback or breakeven time for
the bond is
a.
1.75 years.
b.
2.89 years.
c.
3.20 years.
d.
3.60 years.
e.
4.32 years.
25
72. The exercise price of The Canadian Dairy Company is $17. You purchase the warrants for $4.00 each
when Canadian Dairy’s stock price is $20.00 per share. Each warrant entitles you to purchase one share
of CDC stock. Calculate your percentage gain assuming the warrant premium drops by 50% and you
sell your warrants when the stock reaches $30.00 per share.
a.
37.5%
b.
87.5%
c.
137.5%
d.
237.5%
e.
337.5%
Exhibit 14-10
USE THE FOLLOWING INFORMATION FOR THE NEXT QUESTION(S)
The WallMal Company has entered into a 4-year interest rate swap, with semiannual settlement, to pay
a fixed rate of 8% per year and receive 6-month LIBOR. The notional principal is $50,000,000.
73. Refer to Exhibit 14-10. Assume that one year later the fixed rate on a new 3-year receive fixed pay
floating LIBOR swap has fallen to 7% per year. Settlement is on a semiannual basis. Calculate the
market value of the FRN based on $100 face value.
a.
$102.66
b.
$100.00
c.
$95.56
d.
$89.63
e.
$70.77
26
74. Refer to Exhibit 14-10. Assuming that one year after the swap was initiated the fixed rate on a new
3-year receive fixed pay floating LIBOR swap has fallen to 7% per year, calculate the market value of
the 8% fixed rate bond based on $100 face value. Settlement is on a semiannual basis.
a.
$102.66
b.
$100.00
c.
$95.56
d.
$89.63
e.
$70.77
75. Refer to Exhibit 14-10. Indicate the market value of the swap to the WallMal Company.
a.
$3,525,120
b.
−$3,500,000
c.
$1,332,150
d.
−$1,332,150
e.
$1,026,600
76. Refer to Exhibit 14-10 Assume that one year later the fixed rate on a new 3-year receive fixed pay
floating LIBOR swap has risen to 9% per year. Settlement is on a semiannual basis. Calculate the
market value of the FRN based on $100 face value.
a.
$97.42
b.
$100.00
c.
$92.56
d.
$99.63
e.
$75.77
27
77. Refer to Exhibit 14-10. Assuming that one year after the swap was initiated the fixed rate on a new
3-year receive fixed pay floating LIBOR swap has risen to 9% per year, calculate the market value of
the 8% fixed rate bond based on $100 face value. Settlement is on a semiannual basis.
a.
$76.45
b.
$101.24
c.
$100.0
d.
$97.42
e.
$70.77
78. Refer to Exhibit 14-10. Indicate the market value of the swap to the WallMal Company.
a.
$5,786,345
b.
−$3,575,987
c.
$1,289,450
d.
−$1,514,900
e.
$1,250,075
Exhibit 14-11
USE THE FOLLOWING INFORMATION FOR THE NEXT PROBLEM(S)
An international investment firm buys an interest rate cap that pays the difference between LIBOR and
6% if LIBOR exceeds 6%. Current LIBOR is 5%. The amount of the option is $1,500,000, and the
settlement is every 3 months. Assume a 360 day year.
79. Refer to Exhibit 14-11. Find the payoff if LIBOR closes at 4.7%.
a.
−$45,000
b.
−$11,250
c.
$0
d.
$11,250
e.
$45,000
28
80. Refer to Exhibit 14-11. Find the payoff if LIBOR closes at 6.3%.
a.
−$45,000
b.
−$11,250
c.
$0
d.
$11,250
e.
$45,000
Exhibit 14-12
USE THE FOLLOWING INFORMATION FOR THE NEXT QUESTION(S)
The Skalmory Corporation has entered into a 3-year interest rate swap, with semiannual settlement, to
pay a fixed rate of 7.5% per year and receive 6-month LIBOR. The notional principal is $10,000,000.
81. Refer to Exhibit 14-12. Assume that one year later the fixed rate on a new 2-year receive fixed pay
floating LIBOR swap has fallen to 7% per year. Settlement is on a semiannual basis. Calculate the
market value of the FRN based on $100 face value.
a.
$101.33
b.
$100.58
c.
$100.00
d.
$98.67
e.
$95.83
82. Refer to Exhibit 14-12. Assuming that one year after the swap was initiated the fixed rate on a new
2-year receive fixed pay floating LIBOR swap has fallen to 7% per year, calculate the market value of
the 7.5% fixed rate bond based on $100 face value. Settlement is on a semiannual basis.
a.
$101.33
b.
$100.92
c.
$100.00
d.
$98.67
e.
$95.83
29
83. Refer to Exhibit 14-12. What is the market value of the swap to the Skalmory Corporation?
a.
−$9,000,000
b.
−$1,804,000
c.
−$87,654
d.
$91,830
e.
$7,620,000