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sir whoever there is an interest swap calculation with a bank where fixed stream of payments is exchanged for variable or vice-versa, we use the forward rates. now these forward rates calcualted are arrived at by using the company’s specific spot yield curve or the government yield curve?
like in pault co(SEP/DEC 16) and sembilan co the annual spot yield curves given to us are of the company or treasury spot yield curves?
just so that in the exam we can be mindful of whether there is a need for us to alter it.
2nd separate doubt)
sir in a hypotethical scenario if the floating rate payable on a bond is –“The interest on the loan notes is payable annually and is based on the spot yield curve, plus 50 basis points.” and the company arranges for a fixed rate swap with a bank, after taking account of all commissions and banks fees, we get an effective fixed rate of 5.797% (lock-in rate).
Now my doubt is for this swap to become beneficial to the company the yield has to go above 5.797-.5=5.297%, isn’t it? So, only if the yield goes beyond 5.297% will the company benefit from coming into the swap agreement.
Can you please tell if am heading in the right direction or not?
1. How the swap is arranged depends on what the two parties agree on. In both Pault and Sembilan, the question specifically say that the swap was in exchange for a variable amount based on the yield rate. It does not have to be (although this is probably the most common) and depends on what the question states as having been agreed.
2. Whether the swap is beneficial or not depends on three things – whether or not there is an overall gain taking both parties together; how they agree to share that gain; and the amount of the fees payable to the party arranging the swap.
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