can i know how the increase and decrease in interest rate is incorporated to the swap?
also can i know how in the answer they had calculated
Keshi Co's effective borrowing rate(after swap) and
the percentage Keshi Co pays?
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D14Q2(a) SWAP
9y ago#1The increase and decrease is irrelevant if they swap because the swap means that they end up paying fixed interest, whatever happens to the floating interest rate.
If K borrows fixed at 5.5% and the other borrows floating at L+0.3%, then the total comes to L + 5.8%
If K borrows floating at L+0.4 and the other borrows fixed at L+4.6% then the total comes to L + 5%
So what they should do is the second option and swap i.e. pay each others interest. Between then they will save 0.8% of which K will get 70% which is 0.56% saving.
Without the swap Keshi pays fixed interest of 5.5%.
With the swap they save 0.56% and so end up paying 5.5 – 0.56 = 4.94%. In addition they have to pay 0.1% to the bank which gives a final total of 4.94 + 0.1 = 5.04%.
The free lecture on swaps will help you.
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