Interest rate swap via intermediary

Nnaruto11y ago

Dear Sir, Can you please assist on the below: 12month loan Company A can borrow at Fixed 5.40% and variable L+0.5 (want to borrow at Fixed) Company B can borrow at Fixed 4.85% and variable L+0.65 (want to borrow at Variable) Bank quotes swap rates 4.5(bid) and 4.52(ask) Can you please explain how the swap will work via the intermediary. I have the answer in the book but I cannot understand what its trying to do. The bid and Ask rates are confusing. Thank you

John MoffatTutor11y ago#1

If A borrows fixed and B borrows floating, then in total they will pay 5.4 + (L + 0.65) = L + 6.05% If B borrows fixed and A borrows floating, then in total they will be 4.85 + (L + 0.5) = L + 5.35% So buy swapping there is a saving to be made of 0.7% which will need to be shared between them.

Nnaruto11y ago#2

Thank you sir. I have understood what you mean. How about the bid and ask from the bank? when to use bid and when to use ask? how will it affect the savings that A & B will receive?

John MoffatTutor11y ago#3

The bid and ask are the rates depending on whether you are borrowing or depositing and are only relevant in actually sorting out the swapping. The current examiner does not expect you to deal with this.

Nnaruto11y ago#4

Great!! Thank you again.

John MoffatTutor11y ago#5

You are welcome :-)