1. Firm A’s management is very conservative whereas Firm B’s is more aggressive. All else equal, which firm would probably have larger holdings of marketable securities? Explain your answer.
2. Explain three major factors determining an investor’s risk tolerance level.
3. Bank A agreed to receive a 3-month LIBOR and pay 9% per year on a notional principal of $50 million. The remaining life of the swap is 10 months. LIBOR spot rates for 1-month, 4-month, 7-month, and 10-month, are 7%, 8%, 9%, and 10%, respectively. The rate of the 3-month LIBOR on the last payment date was 7%.
Note: Use 30/360 day count
a) PV of the fixed leg?
b) PV of the floating leg?
c) Value of the swap to Bank A?