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Sir,
The question has given both spot yield and FRA. The company currently pays spot+60 basis points. But bank is exchanging the fixed rate by FRA + Basis. The company must pay spot+0.60 to its bond holders.Why this inconsistency?
There is no inconsistency. The whole purpose of arranging a swap is to end up paying fixed interest instead of floating interest (or vice versa) and the swap will only be arranged if, as a result, the two parties can make an overall interest saving which they will share between them.
They will still pay floating to their bond holders, but they will receive floating interest from the swap party (so LIBOR cancels out) and they will pay the fixed interest to the swap party. They end up paying a net fixed rate.
Please do watch my free lecture on swaps – I obviously can’t type it all out here 🙂
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