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!
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%
Eureka! Thanks John
You are welcome
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