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Question 20 Companies A and B have been offered the following rates per annum on a $10 million 5 year loan. Answer saved Fixed rate loan - Company A: 4%, Company B: 5.5% Marked out of Floating rate loan - Company A: LIBOR + 0.5%, Company B: LIBOR + 1% 1.00 Flag question Suppose that a bank, acting as swap dealer, enters into interest rate swaps with companies A and B, thus earning 0.2%, while the remaining gain is shared equally between the two companies. Assume that the floating rate of both interest rate swaps equals the LIBOR rate. The fixed rate on Company A's swap with the bank is closest to: O a 4.0% Ob 3.9% Oc. 4.1% Clear my choice Question 21 A financial institution has entered into an interest rate swap with company X. Not yet Under the terms of the swap, it receives 5% per annum and pays six-month LIBOR on a principal of $5 million for five years. Payments are made every six months. answered Suppose that company X defaults on the sixth payment date (end of year 3) when the six-month forward LIBOR rates for all maturities are 3% per annum. Marked out of Assume that six-month LIBOR was 3.5% per annum halfway through year 3 and that at the time of default all OIS rates are 2.5% per annum. 1.00 OIS rates are expressed with continuous compounding; other rates are expressed with semiannual compounding. Flag question The loss to the financial institution is closest to: a $462,730 Ob $231,365 O c. $347,048

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