Axil Corp. has not tapped the Deutsche mark public debt market because of concer
ID: 2762052 • Letter: A
Question
Axil Corp. has not tapped the Deutsche mark public debt market because of concern about a likely appreciation of that currency and only wishes to be a floating-rate dollar borrower, which it can be at LIBOR + 1%. Bevel Corp. strongly prefers fixed-rate DM debt, but it must pay 1.5% more than the 6.25% coupon that Axil's DM notes would carry. Bevel, however, can obtain Eurodollars at LIBOR + ½%.
1. What is the maximum possible cost savings to Axil from engaging in acurrency swap with Bevel?
2. What is the maximum possible cost savings to Bevel from engaging in acurrency swap with Axil?
Please help explain how to solve this with the equation and not just the answer
Explanation / Answer
What is the maximum possible cost savings to Axil from engaging in a currency swap with Bevel?
a. 1%
b. 75%
c. 2%
d. 1.25%
Differences are Axil – Bevel.
Difference in floating rates is LIBOR+1% - LIBOR+0.5% = 0.5%
Difference in fixed rates is 6.25% - 7.75% = -1.5%
First minus second gives us total benefits on offer from swap:
0.5% - -1.5% = 2%
What is the maximum possible cost savings to Bevel from engaging in a currency swap with Axil?
a. 1%
b. 75%
c. 2%
d. 1.25%
As per solution for 28.
Suppose a bank charges 0.8% to arrange the swap and Axil and Bevel split the resulting cost savings. Then Axil will pay ??? for its floating?rate money and Bevel will pay ???? for its fixed?rate money.
a. LIBOR ? 0.7%; 7.5%
b. LIBOR + 0.4%; 7.15%
c. LIBOR; 7.45%
d. LIBOR + 0.5%; 6.75%
If bank charges 0.8% that means only 1.2% is left over for the two companies. If this is split evenly, then Axil gets 0.6% and Bevel gets 0.6%.
So Axil pays LIBOR+1% - 0.6% = LIBOR + 0.4%
Bevel pays 7.75% - 0.6% = 7.15%.
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