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B c
Fixed rate 4% 5.80% 1.80%
Floating rate Bank rate +0.6% Bank rate +0.4% 0.002Savings 1.2000% 0.8000% 2.00%
Bank fees -0.3000% -0.2000% 0.50%Net savings 0.9000% 0.6000%
B C
Rate before swap (Bank rate +0.6%) -5.80%
Net savings 1.20% 0.80%Net result 0.90% 0.60%
Post Swap
b c
Borrows at -4% (Bank rate +0.4%)
c pays (Bank rate) Bank rate
Bank fees -0.3000% -0.2000%
b paysNet result 0.90% 0.60%
sir pls help with calculation part of how much will b pay as im not getting it from exam kit.
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).)
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