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- This topic has 5 replies, 4 voices, and was last updated 7 years ago by John Moffat.
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- November 12, 2015 at 4:51 pm #282009
Hello John,
Dec 2014 exam/ exercise 2 Keshi Co: swap
could you please explain where does the effective borrowing rate (after swap) 5.04% come from?or
how to get the rate 4.54% Keshi Co pays (alternative calculation)?
Thank you!!
November 13, 2015 at 8:12 am #282093There is more than one way of illustrating it. Here is a different way from the examiners answer:
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.
September 18, 2016 at 2:38 am #340820Thank you very much John. You always make it look so easy.
September 18, 2016 at 11:54 am #340842You are welcome 🙂
March 6, 2017 at 8:46 am #375884Dear Sir,
This is so easy understand . can you please give us this sort of easy solution for interest collar for this BPP Exam kit math 54 troder.
March 6, 2017 at 11:04 am #375942But Troder is not a swap and there isn’t really any other way of dealing with the collar than they way the answer does it.
Have you read my article on collars (it is linked from the main P4 page on this website)?
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