Company X Wants to Borrow $10,000,000 Floating for 5 Years;

question 44

Multiple Choice

Company X wants to borrow $10,000,000 floating for 5 years; company Y wants to borrow £5,000,000 fixed for 5 years. The exchange rate is $2 = £1 and is not expected to change over the next 5 years. Their external borrowing opportunities are: A swap bank proposes the following interest-only swap: Company X will pay the swap bank annual payments on $10,000,000 at an interest rate of $9.80%; in exchange the swap bank will pay to company X interest payments on £5,000,000 at a fixed rate of 10.5%. Y will pay the swap bank interest payments on £5,000,000 at a fixed rate of 12.80% and the swap bank will pay Y annual payments on $10,000,000 with the coupon rate of 12%. If company X takes on the swap, what external actions should they engage in?

• A)They should borrow $10,000,000 at $10%.
• B)They should borrow £5,000,000 at 10.50% interest-only for five years; translate pounds to dollars at the spot rate.
• C)They should borrow £5,000,000 at £10.50% interest-only for five years; translate pounds to dollars at the spot rate; enter long position in a forward contract to buy £5,000,000 in five years.
• D)None of the above

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Definitions:

Nation of Immigrants

Refers to the concept that a country is largely made up of immigrants and their descendants, emphasizing the diversity and multicultural aspects of its population.

Productivity Growth

An increase in the efficiency of production, often measured by the amount of goods and services produced per unit of labor.

Labor Force

All the members of a particular organization or population who are able to work, viewed collectively.

Productivity Per Worker

A measure of output produced per unit of labor, often used to gauge the efficiency and performance of an economy's workforce.