Exam 23: Swap Contracts,convertible Securities,and Other Embedded Derivatives

Exhibit 23.6 Use the Information Below for the Following Problem(S) BioTech Industries has debentures outstanding (par value $1,000) convertible into the company's common stock at $30. The coupon rate is 11 percent payable semiannually and they mature in 10 years. -Refer to Exhibit 23.6.At present,what would be the minimum value of the bond?

The common stock of BioTech Industries pays a dividend of $1 per share and has a current market price of $27 per share.The convertible bond is selling for $1100.The payback or breakeven time for the bond is

Exhibit 23.4 Use the Information Below for the Following Problem(S) Black Gold Industries (BGI) is an independent oil producer with production capacity of 500,000 barrels per month. Due to the cost structure of the business, BGI needs to receive $56.50 per barrel in order to remain solvent. On the other side of this situation is Petrochemicals Unlimited (PU) which uses an average of 500,000 barrels of West Texas crude oil in its normal production operations. The nature of PU's business is such that they will financially suffer if they have to pay more than an average of $57.80 per barrel for oil over the next six years. To hedge against their exposure to volatile oil prices, BI and PU contact a swap dealer to arrange the six-year oil swap described below: - Settlement is made monthly. - The notional principal is for 500,000 barrels per month. - The monthly WTI index value is determined as the average of the daily settlement prices for the crude oil futures contract traded on the New York Mercantile Exchange (NYMEX). - The swap dealer pays BGI $57.00 per barrel. - BGI pays the swap dealer the average NYMEX Oil futures price per barrel. - PU pays the swap dealer $57.50 per barrel. - The swap dealer pays PU dealer the average NYMEX Oil futures price per barrel. -Refer to Exhibit 23.4.Describe the transaction that occurs between PU and the swap dealer if the monthly average oil futures settlement price is $58.45.

All of the following are normal characteristics of a convertible bond,except

Options embedded in real assets owned by firms are known as

The payment of any compensation for loss is contingent on the actual occurrence of a credit-related event under a

Exhibit 23.8 Use the Information Below for the Following Problem(S) An international investment firm buys an interest rate cap that pays the difference between LIBOR and 6% if LIBOR exceeds 6%. Current LIBOR is 5%. The amount of the option is $1,500,000, and the settlement is every 3 months. Assume a 360 day year. -Refer to Exhibit 23.8.Find the payoff if LIBOR closes at 4.7%.

Suppose a corporation desires to borrow financial capital for six months,with two three-month installments.The firm is concerned that interest rates may rise over this period of time.To eliminate interest rate exposure the firm could acquire a

An equity call option issued directly by the company whose stock serves as the underlying asset is known as a

On the settlement date for a forward rate agreement (FRA)contract,the difference between the two interest rates is multiplied by the FRA's par value and prorated by the length of the holding period.

A(n)____ contract is an arrangement whereby the coupon rate on a note moves in the opposite direction of some variable rate index.

Exhibit 23.7 Use the Information Below for the Following Problem(S) The WallMal Company has entered into a 4-year interest rate swap, with semiannual settlement, to pay a fixed rate of 8% per year and receive 6-month LIBOR. The notional principal is $50,000,000. -Refer to Exhibit 23.7.Assume that one year later the fixed rate on a new 3-year receive fixed pay floating LIBOR swap has risen to 9% per year.Settlement is on a semiannual basis.Calculate the market value of the FRN based on $100 face value.

Exhibit 23.7 Use the Information Below for the Following Problem(S) The WallMal Company has entered into a 4-year interest rate swap, with semiannual settlement, to pay a fixed rate of 8% per year and receive 6-month LIBOR. The notional principal is $50,000,000. -Refer to Exhibit 23.7.Indicate the market value of the swap to the WallMal Company.

An interest rate ____ is a combination of a cap and a floor.

The minimum price of a convertible bond is

Exhibit 23.7 Use the Information Below for the Following Problem(S) The WallMal Company has entered into a 4-year interest rate swap, with semiannual settlement, to pay a fixed rate of 8% per year and receive 6-month LIBOR. The notional principal is $50,000,000. -Refer to Exhibit 23.7.Indicate the market value of the swap to the WallMal Company.

An investor considering investment in warrants as part of an overall program,should consider which of the following?

Exhibit 23.6 Use the Information Below for the Following Problem(S) BioTech Industries has debentures outstanding (par value $1,000) convertible into the company's common stock at $30. The coupon rate is 11 percent payable semiannually and they mature in 10 years. -Refer to Exhibit 23.6.Calculate the straight-bond value assuming that bonds of equivalent risk and maturity are yielding 14 percent per year compounded semiannually.

In an interest rate swap,the fixed rate payer profits if interest rates fall.

A major difference between a call option and a warrant is that call options are issued by the company so that any proceeds from the sale of stock go to the issuing firm.