Forums › Ask ACCA Tutor Forums › Ask the Tutor ACCA AFM Exams › Keshi CO 12/14 Part a Swap

- This topic has 5 replies, 3 voices, and was last updated 7 years ago by John Moffat.

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- May 30, 2015 at 6:32 pm #250720
Hi Sir,

Can you please help me explain how did the examiner calculated the value of 4.54% from alternative swap in part a? Thank you.

May 31, 2015 at 10:10 am #250855Without the swap, if borrowing fixed then Keshi would have paid 5.5%

There is a benefit by swapping of 0.8%, of which Keshi gets 70% which is 0.56% less charge of 0.10% = 0.46%Therefore Keshi must end up paying 5.5% – 0.46% = 5.04%.

But because of swapping, Keshi borrows floating and pays L + 0.4%

To make things ‘work’ the counterparty will pay L to Keshi. So now Keshi is paying L + 0.4% – L = 0.4%

Keshi has to end up paying a total of 5.04% (as above) of which 0.1% is charges – the remainder is 4.94%

So, to make things ‘work’ completely, Keshi must pay the counterparty 4.94% – 0.4% = 4.54%

May 31, 2015 at 12:13 pm #250939Thank you so so so much Sir.

May 31, 2015 at 3:12 pm #250997You are welcome 🙂

December 6, 2016 at 6:13 pm #354659Good day sir, How did the gain become 8% and not 10% on the swap

December 7, 2016 at 6:34 am #354849If K borrows fixed at 5.5% and the other borrows floating at L+0.3%, then the total comes to L + 5.8%

If K borrows floating at L+0.4 and the other borrows fixed at L+4.6% then the total comes to L + 5%

So what they should do is the second option and swap i.e. pay each others interest. Between then they will save 0.8% of which K will get 70% which is 0.56% saving.

Without the swap Keshi pays fixed interest of 5.5%.

With the swap they save 0.56% and so end up paying 5.5 – 0.56 = 4.94%. In addition they have to pay 0.1% to the bank which gives a final total of 4.94 + 0.1 = 5.04%.The free lecture on swaps will help you.

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