Interest Rate Swap

I will explain in a different way which I think is more clear. From the first part of the workings we know that the end result is that both parties will save 1% from the swap, or 0.5% each after the banks fees. If we use Titans as an example, if they had borrowed floating themselves they would have paid L + 1% and so to save 0.5% then must end up paying a net L + 0.5% (because of the saving). They in fact borrow fixed and so will be paying interest of 8%. Because they swap, they will also have to pay Kendri's interest of L + 2%, and will receive 8% from Kendri. So, so far Titan is paying the following: 8% + (L + 2%) - 8% + 0.5% (banks fees) = L + 2.5% However we want them to end up paying L + 0.5%. To make this happen, Kendri will have to pay Titan another 2% (so Titan receives in total from Kendri 8% + 2% = 10% (As a check, let us to the same for Kendri: If they borrow fixed themselves then they would pay 11%. But we want them to say 0.5% after fees, so they must end up paying 10.5%. They instead borrow floating and pay L + 2%, but then swap so that they receive L + 2% from Titan, and pay Titans interest of 8% So far they are paying a total of (L + 2%) - (L + 2%) + 8% + 0.5% (bank fees) = 8.5% But...we said that the must end up paying 10.5%, so they will pay an extra 2% (10.5 - 8.5) to Titan. So the total they will pay to Titan is 8% + 2% = 10%.

Thank you John. Your explanation has made it much clearer for my understanding!

You are welcome :-)