BURYECS CO (MAR/JUN 17)

It is always the missing figure in order to make things 'work'. If B borrowed floating themselves (without a swap) they would be paying bank rate + 0.6%. There is a gain to be made from swapping of 1.2% (before bank fees). Therefore they must end up paying a net bank rate + 0.6% - 1.2% = bank rate - 0.6% (before bank fees). With the swap they will borrow fixed and pay 4% They will then pay bank rate to C, so they are now paying 4% + bank rate. To end up paying the amount in the second paragraph, then will have to receive the difference from C, and the difference is 4% + bank rate - (bank rate - 0.6%) = 4.6%. (If you do similar working for C, then in the same way you will find that they will have to pay 4.6% to B so as to end up paying the correct net amount (before bank fees).)