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the cima notes published on this site, page 34, example 2. yes the answer is there on page 84 but i do not understand how they have derived that answer. Can someone please help me coz i dont seem to be understanding swaps.
Thanks a lot!
I think the solution could be wrong on this one so maybe you understand it better than you thought?
The solution has L + 1.5% as the variable rate borrowing for both company A and company B but the question gives L + 1% for the variable rate for company A. Assuming it is the solution that is wrong, working through I got the saving to be 0.5% rather than 1% so 0.25% saving for each company. The final table I got was
……………………………………A………………….B
Borrows…………………….(10%)…………(L + 1.5%)
A pays B variable………….(L)…………………L
B pays A fixed…………….9.25%…………(9.25%)
Outcome……………….(L + 0.75%)……..(10.75%)Thank you! yes i also noticed the error but i thought i was wrong.Thanks for confirming!
If you’re good in swaps, can you help me please? i understand the basics but i get stuck when it gets to a sum (even a simple one as this).Really appreciate if you could assist me! Thanks.
Thank you! yes i also noticed the error but i thought i was wrong.Thanks for confirming!
If you’re good in swaps, can you help me please? i understand the basics but i get stuck when it gets to a sum (even a simple one as this).Really appreciate if you could assist me! Thanks
If you’ve any specific questions I’m happy to have a look and try to help explain them. That’s if I understand it myself, I’ve also had trouble with these but I think I’m getting the hand of them now.
Question 91 of Kaplan Exam Practice Kit.
Company A would like to take out a variable rate loan for a new project. Company B also has a new project but would like to take out a fixed loan in order to have certainty over interest payment.
Company A has been quoted a fixed rate of 7% and a variable rate of LIBOR + 4%.
Company B has been quoted a fixed rate of 6% and a variable rate of LIBOR + 2% as it has a higher credit rating than A.If they enter into a swap agreement, what effective rate will each end up paying?
a. Co A 7% and Co B LIBOR + 2%
b. Co A LIBOR + 4% and Co B 6%
c. Co A LIBOR + 2% and Co B 7%
d. Co A LIBOR + 3.75% and Co B 5.5%I know these are easy questions but i get all puzzled when i try to figure them out. Would be great help if you could send me the working and i am so sorry for the trouble i’m putting you through! Thanks a lot!
The way I set these out is the diagram below, I’ll explain what I do so you will hopefully understand it.
I draw a cross through with a total at the ends of the lines – that’s a line from 6% through L+4% with the total, L + 10%, at the end and one from 7% through L+2% with the total, L+9%, at the end. As below but I can’t put the diagonal lines in.
I know that L + 9% is the lower of the two so that is the amount that they will have to take out (T/O) with the bank so I put T/O next to the rates that were combined to make up that total (i.e. on that diagonal line).
The difference between the two totals is 1% so I note that underneath along with the split. In this case we’re not told so I do a 50:50 split.
I put E/R (Effective rate) next to the rates on the other diagonal line. It doesn’t make sense initially for the higher total to be the effective rate but you’re going to deduct the saving from these figures which will reduce it. Therefore, I make a note of the saving under each ‘E/R’ rate.
You can then see that the effective rate are :-
A : L + 4% – 0.5% = L + 3.5%
B : 6% – 0.5% = 5.5%That’s D – I think you have a typo with 3.75%, it should be 3.5%
——————————
…………..Fixed………………….Variable………L + 10% (higher E/R)
A………..7% (T/O)……………….L + 4% (E/R)
………………………………………..-0.5% (saving)B………..6% (E/R)……………….L + 2% (T/O)
………….-0.5% (saving)
…………………………………………………………L + 9% (lower T/O)Saving = 1%, 0.5% to each company
I have come across this question on interest rate swaps. It did look quite simple but i couldn’t find a similar question to this. Im used to seeing fixed rate and LIBOR % or Normally id be given what % the bank offers as appose to the range of %. I think that is what thrown me.
Could you advise on the following?
Question:
– 8% coupon bonds and want change its interest rate by entering interest swap rate with its bank.
– bank quoted swap rate of 7% – 7.5%What is the companys new interest profile be?
A. Variable at risk free rate
B Variable at risk free rate + 0.5%
C. Variable at risk free rate + 1.0%
D. Fixed at 7.5%
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