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New Microsoft Word Document - Word LINGS REVIEW VIEW Assume Bremen Security, a Germany based company, has issued 1 million euro three years bonds with a variable interest rate of 1 percent (100 basic points) above LIBOR. Please note: The bond is a standardized product which can be traded on exchanges. The total amount of the principal is 1 million. The financial management department of Bremen Security is looking for an investor willing to pay on a notional principal of 1 million LIBOR plus 100 basic points for three years. By this the interest rate risk is captured or hedged - from the perspective of Bremen Security and shifted to the investor. Of course, this causes some cost. Assume that the investor is only willing to agree on this contract if Bremen Security is willing to pay over the whole five years a certain fixed interest rate. Here we take 2 percent. Whether the investor or Bremen Security is the winner totally depends on the movement of the LIBOR and is unclear sofar. Nevertheless, Bremen Security can calculate now with a fixed interest rate Here we take 2 percent. Whether the investor or Bremen Security is the winner totally depends on the movement of the LIBOR and is unclear sofar. Nevertheless, Bremen Security can calculate now with a fixed interest rate. What are costs for Bremen Security in euro? 60000 6000 2000 0 4000 40000 20000 New Microsoft Word Document - Word LINGS REVIEW VIEW Assume Bremen Security, a Germany based company, has issued 1 million euro three years bonds with a variable interest rate of 1 percent (100 basic points) above LIBOR. Please note: The bond is a standardized product which can be traded on exchanges. The total amount of the principal is 1 million. The financial management department of Bremen Security is looking for an investor willing to pay on a notional principal of 1 million LIBOR plus 100 basic points for three years. By this the interest rate risk is captured or hedged - from the perspective of Bremen Security and shifted to the investor. Of course, this causes some cost. Assume that the investor is only willing to agree on this contract if Bremen Security is willing to pay over the whole five years a certain fixed interest rate. Here we take 2 percent. Whether the investor or Bremen Security is the winner totally depends on the movement of the LIBOR and is unclear sofar. Nevertheless, Bremen Security can calculate now with a fixed interest rate Here we take 2 percent. Whether the investor or Bremen Security is the winner totally depends on the movement of the LIBOR and is unclear sofar. Nevertheless, Bremen Security can calculate now with a fixed interest rate. What are costs for Bremen Security in euro? 60000 6000 2000 0 4000 40000 20000

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