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Hie Mr John
I don’t understand where they got the
Interest rate after swap for company Y which is
SOFR + 0.15%I understand for company X 5.65%
The questions goes like this:
Company X wishes to raise $50 million. It would prefer to issue fixed rate
debt and can borrow for one year at 6% fixed or SOFR + 80 points.
Company Y also wishes to raise $50 million and to pay interest at a
floating rate. It can borrow for one year at a fixed rate of 5% or at SOFR +
50 points.
Required:
Calculate the effective swap rate for each company – assume
savings are split equally.If X were to borrow fixed and Y were to borrow floating then in total the interest payable would be SOFR + 6.5%.
If on the other hand X were to borrow floating and Y was to borrow fixed (and then swapped the payments) then the total interest payable would be SOFT + 5.8%.
Therefore it will make sense to do the latter and swap because there would be a total saving of 0.7%, which if split equally would save them each 0.35%.
Without swapping, Y would have been paying SOFR + 0.5%. Therefore because of the saving through swapping of 0.35%, the swap would end up meaning that they would be paying SOFR + 0.5% – 0.35% = SOFR + 0.15%.
Have you watched my free lectures on swaps? 🙂
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