- Your Firm Needs To Raise 102 4 Million In Funds You Can Borrow Short Term At A Spread Of 1 0 Over Libor Alternativel 1 (96.8 KiB) Viewed 79 times
borrow short term at a spread of 1.0% over LIBOR. Alternatively,
you can issue 10-year, fixed-rate bonds at a spread of 2.58% over
10-year Treasuries, which currently yield 7.46%.
Current 10-year interest rate swaps are quoted at the LIBOR versus
the 8.1% fixed rate.
Management believes that the firm is currently "underrated" and
that its credit rating is likely to improve in the next year or
two. Nevertheless, the managers are not comfortable with the
interest rate risk associated with using short-term debt. a.
Suggest a strategy for borrowing the $102.4 million. What is your
effective borrowing rate?
b. Suppose the firm's credit rating does improve three years later.
It can now borrow at a spread of 0.50% over Treasuries, which now
yield 8.91% for a seven-year maturity. Also, seven-year interest
rate swaps are quoted at LIBOR versus 9.25%. How would you lock in
your new credit quality for the next seven years? What is your
effective borrowing rate now?
Your firm needs to raise $102.4 million in funds. You can borrow short term at a spread of 1.0% over LIBOR. Alternatively, you can issue 10-year, fixed-rate bonds at a spread of 2.58% over 10-year Treasuries, which currently yield 7.46%. Current 10-year interest rate swaps are quoted at the LIBOR versus the 8.1% fixed rate. Management believes that the firm is currently "underrated" and that its credit rating is likely to improve in the next year or two. Nevertheless, the managers are not comfortable with the interest rate risk associated with using short-term debt. a. Suggest a strategy for borrowing the $102.4 million. What is your effective borrowing rate? b. Suppose the firm's credit rating does improve three years later. It can now borrow at a spread of 0.50% over Treasuries, which now yield 8.91% for a seven-year maturity. Also, seven-year interest rate swaps are quoted at LIBOR versus 9.25%. How would you lock in your new credit quality for the next seven years? What is your effective borrowing rate now?