An English company with a subsidiary in the United States is seeking alternatives for funding of USD 20 MM to three years for its subsidiary. Document Preview:
0.12 0.14000000000000001 0.13700000000000001 There are two banks, Banco Hipotecario and Banco Working Capital, with quite different placements portfolios.Bank loans are mortgage Mortgage A fixed rate (mortgage with a term of 15 to 20 year fixed rate loans) and deposits have a short-term nature (savings deposits, certificates of deposit).Working Capital Bank specializes in short-term loans with returns that vary according to market conditions (short-term loans at variable rates) and its funding is mainly bonds in capital markets (fixed rate).If rates fall won Banco Hipotecario and Banco Working Capital lose, and if rates rise will result in investmentBoth institutions have a risk of major ratesQuestionTo reduce your risk of rate both banks decide to enter into a swap transaction with the following informationNotional Amount USD 10,000,000Swap period five years, annual paymentsBanco Hipotecario pays 12% fixed-rate work to Bank CapitalDetermine the payment flows of the two banks for five years with a projected LIBOR between 7 and 10%Bank Pays Working capital libor + 3% to Bank HipotecarioIS just taken a loan of USD 10 MM of a commercial bankThe loan is for three years, variable rate of Libor + 1% and interest payments every six monthsCFO IS perceives the risk involved in having a variable rate loan taking into account some reports indicating the possibility of increasing the level of rates in the coming monthsAs a result decides to call his investment bank to quote a swapThe Bank proposes a three-year swap agrees to pay by IS a 9.75% rate with payments every six months with a “notional principal” of USD 10,000,000IS in return would receive a payment of Libor + 1% with the same notional principalThe projected rates are:Libor projected termCurrent 8%6 months 8.50%12 months 9.00%18 months 9.25%24 months 9.40%30 months 8.50%What would be your recommendation to IS on the proposed swap received?Gold Credit Corporation contact your Investment…
Attachments:
swaps.xlsx
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