1. (complete chart) Bank of America sells a 12 year fixed rate bond at 6%. At...

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Finance

1. (complete chart) Bank of America sells a 12 year fixed ratebond at 6%. At the same time of the issue the company buys areceiver swaption, 6% and paying variable rate based on LIBOR with5 years remaining to expiration, 2.5% premium. Fill in the tablebelow assuming the exercise of the swaption - complete bond
2. Explain the net effect to BOA
3. Explain the net effect to bondholders
please write legible
Year LIBOR at Year end BOA pays to bond holders BOA pays to swaption BOA receives from swaption Net Cost to BOA
1 10%
2 12%
3 9%
4 8%
5 11%
6 7%
7 5%
8 4%
9 6%
10 2%
11 4%
12 7%

Answer & Explanation Solved by verified expert

3.6 Ratings (415 Votes)

Receiver swaption gives the buyer the option but not the obligation to enter into a swap of receiving fixed rate and paying the variable rate Now the buyer will only exercise the option is the LIBOR is lower than 6 that ways he will cover his cost of paying the See Answer

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Year	LIBOR at Year end	BOA pays to bond holders	BOA pays to swaption	BOA receives from swaption	Net Cost to BOA
1	10%
2	12%
3	9%
4	8%
5	11%
6	7%
7	5%
8	4%
9	6%
10	2%
11	4%
12	7%