Sept 2016 mock exam- Stentor & Evnor

Hello Sir!

My query is regarding the question on interest rate swaps.

In your lecture on interest rate swaps,all seemed easy and well understood. But here when I work using your approach, I’m getting a different answer compared to the examiner’s.

I worked this way,if I’m wrong somewhere please do specify:

Under own borrowings, we add 8.75% of S’s fixed rate with L + 0.90% of E’s floating rate giving us a total of: L+9.65%

Then under swap borrowing, we take the addition of L+0.50% of S’s floating rate with 9.50% of E’s fixed rate giving us a total of L+10%

Next, we subtract the difference between the swap borrowings and own borrowings giving us a SAVING of 0.35% which is split into 2: 0.175 each.

The end result would therefore be:
S ([8.75 + 0.05]-0.175) = 8.625%
E ([L+0.90 + 0.05]-0.175) = L+0.775%

Thank you.