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Appendix 2

27 Company X would like to take out a variable rate loan for a new project.
Company Y also has a new project but would like to take out a fixed rate loan
in order to have certainty over interest payments.

Company X has been quoted a fixed rate of 8% and a variable rate of LIBOR
+ 4%. Company Y has been quoted a fixed rate of 7% and a variable rate of
LIBOR + 2% as it has a higher credit rating than X.

If they enter into a swap arrangement, agreeing to split gains equally,
what effective rate will each end up paying?

A Co X 7% Co Y LIBOR + 2%

B Co X LIBOR + 4% Co Y 7%

C Co X LIBOR + 2% Co Y 8%

D Co X LIBOR + 3.5% Co Y 6.5%

28 It is 31 December and Stives plc is arranging a six month £10 million loan
commencing on 1 September, based on LIBOR. Stives wants to hedge against
an interest rate rise using an IRG. The current LIBOR is 6%.

The IRG fee is 0.25% p.a. of the loan.

If LIBOR turned out to be 7% on 1 September, calculate the effective net
interest rate.

29 Investors will wish to hedge against an interest rate fall by:

A Selling futures now and selling futures on the day that the interest rate is
fixed

B Selling futures now and buying futures on the day that the interest rate is
fixed

C Buying futures now and selling futures on the day that the interest rate is
fixed

D Buying futures now and buying futures on the day that the interest rate is
fixed

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