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Hi, in the link below:
In the illustration (table) of the swap, please may I know how to get that 2.9% for “Barrow Co receives” & “Greening Co pays”?
Thank you.
It is the missing figure so as to achieve the desired result.
If they did not swap, then B would pay ESTR + 1.5% floating, and G would pay 4.5% fixed.
There is a gain to be made by each of them (before bank charges) of 0.8%. Therefore B must end up paying ESTR + 0.7% , and G must end up paying 3.7%.
The way the swap works is the B will borrow fixed and pay 3.6%, and G will borrow floating and pay ESTR + 0.8%.
B will then pay ESTR to G, so B is then paying a total of 3.6% + ESTR, and G is then paying a net 0.8%.
For G to end up paying 3.7% (as calculated in the third sentence above) they must then pay 3.7 – 0.8 = 2.9% to B.
(and is works, because if B receives 2.9% they are then paying a net ESTR + 3.6 – 2.9 = ESTR + 0.7% )
Have you actually watched my free lectures on swaps? I explain all this in the lectures.
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