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Appendix 2

27 D

There is a bigger difference in the variable rates so to take advantage of this, Y
will borrow variable and X then has to borrow at a fixed rate.

Use L% to get Y on fixed and X on variable. Then 4.5% is the balancing figure
to split the saving on an equal basis.

It would work out like:
Co X Co Y

Paid to bank (8%) (L+2%)
A pays B (L) L
B pays A 4.5% (4.5%)
–––––––– ––––––
Net effect (L + 3.5%) (6.5%)

28 8.25

31 December:

Stives would purchase IRG8–14 @ 6%

1 September:

(a) LIBOR = 7%

Stives will pay loan interest (7.00)
Pay fee (0.25)

Claim on IRG 1.00
–––––
Net interest (6.25)

29 C

The correct answer is C – The interest rate risk arises between the present day
and when the investment is made – the rate may fall and cost the investor
more. An investor should buy an interest rate future now at a high interest rate
(100 – r where r is, say, 10% = 90) and sell it later at the lower rate (100 – r
where r is say 5% = 95). Buying at 90 and selling at 95 creates the profit you
will need to offset the decreased interest received.

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