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Company X wishes to raise $50 million. It would prefer to issue fixed rate
debt and can borrow for one year at 6% fixed or SOFR + 80 points.
Company Y also wishes to raise $50 million and to pay interest at a
floating rate. It can borrow for one year at a fixed rate of 5% or at SOFR +
Calculate the effective swap rate for each company – assume
savings are split equally.
Actual borrowing (SOFR + 0.8%) (5%)
X to Y (4.85%) 4.85%
Y to X SOFR (SOFR)
Interest rates after swap (5.65%) (SOFR + 0.15%)
Open market cost – no swap (6%) (SOFR + 0.5%)
Saving 35 points 35 points
Pls tell why they have used 4.85% in x to y?
It is the missing figure.
There is a total saving to be made of (6 + SOFR+0.5) – (5 + SOFR+0.8) = 0.70, or 0.35% for each to them.
Therefore X must end up paying 6 – 0.35 = 5.65%
As a result of the swap, X will pay SOFR + 0.8, and will receive SOFR from Y, which so far means they are paying 0.8%. So for them to end up paying 5.65% it must mean that they will pay Y 5.65 – 0.8 = 4.85%