Vincent Roy Rivera

BSA – 4

Assignment 8

1. Asset swap involves transactions in which the investor acquires a bond position and then
enters into an interest rate swap with the bank that sold him/her the bond. The investor pays
fixed and receives floating. This transforms the fixed coupon of the bond into a LIBOR-based
floating coupon.
example. suppose an investor buys a bond at a dirty price of 110% and wants it hedge the risk
of a default by the bond issuer. She contacts a bank for an asset swap. The bond's fixed
coupons are 6% of par value. The swap rate is 5%.

2. Equity swap is an exchange of future cash flows between two parties that allows each party
to diversify its income for a specified period of time while still holding its original assets
example. one party will pay the floating leg (typically linked to LIBOR) and receive the returns
on a pre-agreed-upon index of stocks relative to the notional amount of the contract.

3. Troubled debt Restructuring is defined as a debt restructuring in which a creditor, for

economic or legal reasons related to a debtor's financial difficulties, grants a concession to the
debtor that it would not otherwise consider.