Implied term structure of libor rates, Finance Basics

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Implied term structure of libor rates

You observe the following anticipated floating rate swap payments, each based on a notional $ 100 M. Assume semi-annual compounding.

Floating Payments

t=0 0.5 1 1.5

1 year swap 1M 1.1M

1.5 year swap 1M 1.1M 1.12M

a. Construct the implied term structure of LIBOR rates. What are the corresponding swap rates?

b. You plan to sign a 1.5 year Eurodollar loan today (t = 0) for $l,000,000 for 1% over LIBOR. What is the "no arbitrage" forecast of the interest payments you will make at the end of each 6 month period?

c. Rates may go up and your floating rate payments increase. Conceptually, how would you hedge this possibility?

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Finance Basics: Implied term structure of libor rates

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Finance Basics: Implied term structure of libor rates

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Recent Questions Asked Finance Basics

Q : Estimating the cost of common equity

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Finance Basics: Implied term structure of libor rates

Reference No:- TGS053986

Recent Questions Asked Finance Basics

Q : Estimating the cost of common equity

Q : Withdraws initial contribution and earnings

Q : Average book balance-average available balance

Q : Describe the effects on net income from transactions

Q : Implied term structure of libor rates

Q : Employee can embezzle funds

Q : Exchange rate arbitrage

Q : Processing costs and sales value

Q : Considering replacing equipment problem

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