Test bank chapter 1 Introduction

Solution: ,500,000 x (0.082 - 0.08) = ,000

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Test-Bank-Answers

Solution: $7,500,000 x (0.082 - 0.08) = $15,000.
22. What is the net present value of your swap agreement at a discount rate of 8 percent?

A. $10,000

B. $25,993

C. $55,883

* D. $59,895

E. $60,666

Solution: $15,000 x the annuity discount factor of $1 for 5 years at 8 percent = $15,000 x 3.993 = $59,895.
23. If the floating rate stays the same for the first two years and then falls by 1.5 percent, what will be your net payments for the five years?
A. $ 75,000

B. $ 90,000

C. $100,000

D. -$150,900

* E. -$262,500
Solution: You will receive a total of $30,000 for the first two years [$7,500,000 x (0.082 - 0.080) x 2]. The new floating rate that you will receive: 8.2% - 1.5% = 6.7%. You will pay a total of $292,500 for the last three years [$7,500,000 x (0.067 - 0.08) x 3 years]. Thus, your net payment over the five years will be -$262,500 ($30,000 - $292,500).
Use the following information to answer the next five questions:

Two counterparties agree to enter a foreign currency swap between American dollars and Swiss francs. One dollar is currently worth 1.4 francs. The American dollar payor will provide $500,000. The interest rate on the dollar is 9 percent, and the Swiss franc rate is 8 percent. The swap calls for a life of three years with annual payments.

24. How much will the provider of the dollar pay at the outset?

* A. SFr700,000

B. SFr500,000

C. SFr357,143

D. SFr200,000

E. SFr125,000

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