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Three years ago ABC AG arranged five year fixed borrowing facility at 5 At that time the company correctly predicted that interest rates were about to fall and decided to receive fixed on a five

Three years ago, ABC AG arranged five-year fixed borrowing facility at 5%. At that time the company correctly predicted that interest rates were about to fall, and decided to receive fixed on a five year-year swap at 4%.Today, interest rates are lower and ABC AG will enter into a 2 year swap to lock in these lower rates. Current swap rates are:

Maturity Bid (%) Offer (%)

2 year 1.30 1.40

3 year 1.50 1.60

4 year 1.90 2.00

5 year 2.10 2.20

a) Draw a diagram showing the company’s existing borrowing situation and how using the 2-year swap can change their borrowing profile. (5 marks)

b) Calculate a forward starting one year swap rate starting in two years’ time. You may assume the following (10 marks): The discount factor for year one is 0.98 Annual fixed payments, Accrual factor of 1

 

Sep 08 2020 Read more Less More

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