Q1. Veezee (VZ) issues a 2-year floating rate bond in the amount of $100M on which it pays (LIBOR6 - 0.5%) semi-annually. LIBOR6 refers to 6-month maturity London Interbank Offer Rate (LIBOR). First payment will be due on December 31, 2010. However, VZ would prefer a fixed rate payment. With this objective, it enters into a swap with Citibank as the intermediary swap bank. VZ agrees to pay Citibank an annual rate of 8% and in return will receive LIBOR from Citibank.
All payments are made on a semi-annual basis.
A. In the above swap arrangement, what is the net fixed rate that VZ has to pay?
B. Suppose the LIBOR6 is realized at the end of 6-month periods as follows:
|
|
Dec 31,10
|
Jun 30,11
|
Dec 31,11
|
Jun 30,12
|
Dec 31,12
|
|
|
LIBOR6
|
7%
|
6%
|
8%
|
9%
|
5%
|
|
What will be the net interest payment of VZ for the principal of 100M on each of the dates shown in the above table? Of this amount, how much goes to Citibank?
And how much to VZ's bondholders as interest payment? Show your results by filling out the following table (send the completed table as a part of your answers):
|
|
LIBOR6
|
Net pay to
Citibank
|
Pay to Bond holders
|
Net pay by VZ
|
|
Dec 31,10
|
7%
|
|
|
|
|
June30,11
|
6%
|
|
|
|
|
Dec 31,11
|
8%
|
|
|
|
|
June30,12
|
9%
|
|
|
|
|
Dec 31,12
|
5%
|
|
|
|