Forums › Ask ACCA Tutor Forums › Ask the Tutor ACCA AFM Exams › Q Katmai(12/09)
- This topic has 9 replies, 4 voices, and was last updated 8 years ago by John Moffat.
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- May 26, 2014 at 9:11 am #170878
How to calculate the six monthly interest rate if a vanilla interest rate is agreed?
In this case,would we be paying fixed in return for the floating rate from the counterparty?If yes,then is this correct
We pay 5.4/2=2.7
We receive Libor/2+0.6?Thanks in advance
May 26, 2014 at 6:52 pm #171027No – the swap is against LIBOR.
So, to the bank (who is giving us the swap) we pay them 5.4%/2, and they pay us LIBOR/2.
We will pay the LIBOR/2 + 0.6% on our floating rate notes.
The net result is as follows:
We pay on our notes: LIBOR/2 + 0.6%
The bank pays us: LIBOR/2
We pay the bank: 5.4%/2 = 2.7%The total comes to 2.7% + 0.6% = 3.3%
October 5, 2015 at 9:15 pm #275085Sir,
why do we use in last part of b) compound interest formula: (1+i)^2-1?
Why do not we just multiply 3,3% by 2 which give us 6,6%?
As for me – we should use compound interest if we accrue interest on interest+loan principal. But as far as I remember interest is normally accrued on principal of the loan only.
October 6, 2015 at 6:07 am #275116We always compound it. Its really because you are receiving half the interest earlier – it would be 6.6% if you are not getting any interest until the end of the year, but because you are getting half of it earlier it means the effective interest rate is a bit higher.
October 6, 2015 at 11:05 am #275157Thank you! I got the Idea it is based on the assumption that we will reinvest recieved interest at 3,3% rate…. Not sure whether it is correct…
October 6, 2015 at 11:09 am #275158Thats correct 🙂
November 5, 2015 at 4:50 am #280564Hi sir, does it mean that in plain vanilla swap katmai is exchanging only LIBOR for fixed interest rate because the 120 basis point is related to katmai’s credit rating?
And is the effective interest rate calculated in last part of b) katmai’s effective interest rate after the swap?
November 5, 2015 at 10:07 pm #280710Yes to both 🙂
November 6, 2015 at 2:07 am #280720Thank you sir! 🙂
November 6, 2015 at 4:37 pm #280865You are welcome 🙂
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