QUIZZ 6
1. Consider a convertible bond as follows :
par value……….……….…$1000
Calculate each of the following (show your calculation for each answer) a. conversion value (1 point)
b. market conversion price (1 point) c. conversion premium per share (1 point) d. conversion premium ratio (1 point) e. premium over straight value (1 point)
f. favourable income differential per share (1 point) g. premium payback period (1 point)
What will the convertible bond’s price approximately be if the stock were to drop from $23 to 10$ ? Explain. (2 points)
2.
Company A and B have been offered the following rates per annum on a $20Million 5-year loan:
FIXED FLOATING RATE Company A 12% LIBOR + 0.1%
Company B 13.4% LIBOR + 0.6%
Which Company has a comparative advantage in Floating rates ? Why?(1 point)
Company A requires a floating rate loan. Company B requires a fixed-rate loan. Design a swap that will net a bank acting as an intermediary a fee of 0.1% per annum and that will appear equally attractive for both companies. ( 3 points)
Which company is more at credit risk and why? (1 point)
3. A currency swap has a remaining life of 15 months. It involves exchanging interest at 14% on £20 Million for interest at 10% on $30 Million once a year. The term
and 8% in Dollars. All interest rates are quoted with annual compounding. The current exchange rate is $1.65/pound.
What is the value of the swap to the party paying dollars ? (4 points)
4. What is the main difference between an interest rate swap and a currency swap? (2 points)
