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My sincere apologies for the previous thread,Sir regarding the BPP material copyrights. I had accessed it through normal website.
Anyways this is the question I’m referring to:
The following 5 year loan interest rates are available to Stentor Ltd, an AA credit rated company in the Macawber Group, and to Evnor Ltd, a BB+ rated company. Stentor wants to borrow at a floating rate of interest, and Evnor wants to borrow at a fixed rate of interest.
Fixed rate Floating rate
Stentor 8.75% LIBOR + 0.5%
Evnor 9.50% LIBOR + 0.9%A bank is willing to act as an intermediary to facilitate a 5 year swap, for an annual fee of 0.05% of the swap value. Both of these fees are payable by EACH of the companies. Taxation may be ignored.
Evaluate,using an illustrative swap, whether or not an interest rate swap may be arranged that is beneficial to both companies.
I have worked on this question in the previous thread: SEPT 2016 MOCK EXAM- STENTOR & EVNOR.
I used your approach in solving it.
Please help me where I could be wrong.
Thank you.
Your previous answer suggests that you misread the question.
S wants to borrow floating and E wants to borrow fixed.
So without a swap they would be paying in total (L + 0.5) + 9.5 = L + 10If they swap borrow then they would be paying 8.75 + (L + 0.9) = L + 9.65
So there is a saving to be made (before bank fees) of 0.35%
If they decided to share the saving equally (which they don’t have to) then they would each save 0.175%.
Therefore S will end up paying (L + 0.5) – 0.175 = L + 0.325
E will end up paying 9.5 – 0.175 = 9.325(In both cases, less the 0.05 bank fees)
Thank you sir.
But how do we tend to know their desires on the rates when you have been provided with their credit ratings?
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