- 66 -
quarterly installments, together with interest on the unpaid
balance at a rate of LIBOR plus 35 basis points. The spread over
LIBOR increased to 85 basis points after March 1, 1990, if
Merrill did not first exercise its right to call the notes at a
price equal to the unpaid principal balance and terminate the
swap. From Sparekassen's perspective, the structured transaction
was similar to investing in an amortizing loan that paid a margin
over LIBOR, rather than in volatile LIBOR Notes. From Merrill
Capital's perspective, the transaction provided an asset whose
volatility matched and offset the volatility of its liability
under the hedge swap with BFCE or BOT. The step-up in Merrill
Capital's payment obligations provided it a financial incentive
to exercise its call right and cancel the swap. Petitioner's
expert, Beder, concluded that as of the time of its acquisition
of the BFCE Notes, Sparekassen could have expected a net present
value benefit of $7,208, equivalent to a return on its investment
of 41 basis points more than that available in the direct
interbank market.
Page: Previous 56 57 58 59 60 61 62 63 64 65 66 67 68 69 70 71 72 73 74 75 NextLast modified: May 25, 2011