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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?
The 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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