October 17, 2012 at 9:39 am
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 appreciatedOctober 17, 2012 at 1:04 pm
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%October 17, 2012 at 2:21 pm
Eureka! Thanks JohnOctober 19, 2012 at 4:56 am
You are welcomeApril 24, 2015 at 11:26 am
sir dec 14 keshi co, i cant apply this cocept to that question please helpApril 24, 2015 at 5:28 pm
Have you watched the free lecture on interest rate swaps?April 29, 2015 at 6:27 pm
I watched the video lecture on interest rate swaps and apply the concept to Dec 14 Keshi Co:
own: Keshi Co would borrow floating L + 0.4%, and Counter-party would borrow at fix rate 4.6% => Total L + 5%
Swap: Keshi Co now borrows fix 5.5%, Counter-party borrows floating L + 0.3% => Total L + 5.8%.
Can we say that the saving is 0.8%? In this case, I see the swap costs 0.8% more, not less.
Appreciate your advice. Many thanksApril 30, 2015 at 6:58 am
It depends whether Keshi would prefer to end up paying fixed interest or floating interest.
If they wish to end up borrowing fixed (and do it by borrowing floating and then swapping) then there is a saving to be made of 0.8% in total.
The advantage of arranging a swap and ending up paying fixed interest is that there is the saving. The potential downside is that if LIBOR were to fall then they will not get the benefit of the lower interest and may have been better off to have borrowing floating and not to have entered into the swap arrangement.
You must be logged in to reply to this topic.