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Good Afternoon
I am currently working my way through the Sept/Dec 2020 Sample Questions, when looking at Q3 in relation to interest rate swaps, I am happy with how we reach the benefit % of 0.25%
Therefore if Fitzharris were to borrow fixed at 4.6% and received the benefit, the effective cost of borrowing would be 4.6%-0.25% = 4.35%
My question is however, do I then need to continue on and outline the payment streams of the swap, as it effectively leads me to the same overall cost of borrowing?
Gain % for Fitzharris Co = 50% (0·8 – 0·2 – 0·1) = 0·25
Fitzharris Co Counterparty
Rate without swap (4·60%) (Base rate + 1·30%)
Benefit 0·25% 0·25%
Net result (4·35%) (Base rate + 1·05%)
Swap
Borrows at (Base rate + 0·50%) (4·80%)
Fitzharris Co pays (3·80%) 3·80%
Counterparty pays Base rate (Base rate)
Bank fee (0·05%) (0·05%)
Net result (4·35%) (Base rate + 1·05%)Many Thanks
EmmaIt depends what the question actually asks for. Most times it is sufficient to just state the end result (in this case 4.35%).
In this particular question, the requirement specifically asks that your calculations should demonstrate the rates at which payments between counterparts should be made, and so for full marks the payment streams do need showing.
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