Interest rate swap split calc

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    harripool
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    Hi John,

    Lecture example 2 chapter 21.
    Can you explain how we arrive at:
    ‘B’ pays ‘A’ 0.75%

    I understand how we arrive at a split of 0.25% each, but not how this equates to a 0.75% payment?
    I’m obviously missing something simple here, but can’t figure it out!

    Much appreciated


    Profile photo of John Moffat
    John Moffat
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    If company B were to borrow directly at fixed, they would be paying 11%, and so if they are to save 0.25% they must end up paying 10.75%.

    Swapping with A would mean they would be paying 10%, so to make it up to 10.75% they pay 0.75% to A.

    Similarly, if A were to borrow directly at floating, they would be paying L + 1%, and so if they are to save 0.25% they must end up paying a net L + 0.75%.

    By swapping with B they will be paying L + 1.5%, but if they receive 0.75% from B then the net payment will be L + 0.75%


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    harripool
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    • Topics: 13
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    Eureka! Thanks John


    Profile photo of John Moffat
    John Moffat
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    You are welcome :-)

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