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Interest Rate Swap question

Forums › Ask CIMA Tutor Forums › Ask CIMA F3 Tutor Forums › Interest Rate Swap question

  • This topic has 0 replies, 1 voice, and was last updated 4 years ago by saiyuk.
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  • July 16, 2020 at 1:58 pm #576985
    saiyuk
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    • Topics: 4
    • Replies: 2
    • ☆

    Q. XYZ company has a floating rate borrowing , whose interest rate is LIBOR + 1.5%. The directors are concerned that the interest rates are going to rise so have approached a bank to discuss entering an interest rate swap. The bank has quoted a swap rate of 5% against Libor. What is the net interest XYZ will pay if it enters into the swap agreement?

    The answer is 6.5% = (L+1.5%) + 5% – L

    BUT my question is why is that? How are you getting the 6.5% based on above?

    I know that this is a small area of the exam but I don’t seem to get this solution in terms of the numbers.

    So the bank has quoted an offer rate of 5% fixed that the bank is prepared to receive in order to pay Libor so that company XYZ can pay a fixed rate instead. So how did it get to the 6.5%?

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