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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!!
There 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.
Dear 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.
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