16-1

Chapter 16

Other Derivatives

16-2

Floating Rate Note

emiumPrIndex Rate

Interestterm-Short

RateInterest

16-3

Firm L

Fixed rate loan

Swaps dealer

Firm S

Floating rate loan

Interest Rate Swap

9% [LIBOR + 1.30%]

9.15% 9.30%

LIBOR + 0.10%LIBOR + 0.10%

16-4

Fixed and Floating Rates for Firms L and S

Firm L Firm SFixed Rate 9% 11%

Floating Rate LIBOR + 0.30% LIBOR + 1.30%

16-5

Interest Paid in Swaps

Pays Interest on Long-Term Fixed-Rate Bond -9%Receives Fixed Rate from Swaps Dealer 9.15%Pays Floating Rate to Swaps Dealer -[LIBOR + 0.10%]

Net -[LIBOR – 0.05%]

Interest Paid and Received by Firm L in the Swap

Pays Interest on Short-Term Floating-Rate Loan -[LIBOR + 1.30%]Pays Fixed Rate to Swaps Dealer -9.30%Receives Floating Rate from Swaps Dealer +[LIBOR + 0.10%]

Net -10.50%

Interest Paid and Received by Firm S in the Swap

16-6

Convertible Bonds

Call pricePar

TimeMaturityIssue date

Stock value

Straight bond value

$

Convertible price