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Q3b (I) Hi may I know how do we get 4.6% for counter part pays/buryecs co receive?
Q4 (a) referring to answer the last sentence of (a) is ‘market value of $100 bond has fallen by $1.10…..
Why is it a fallen? Isn’t new credit rating generate better discounted cash flow?Thank you.
Q3(b)
It is the missing figure.
Without a swap, Buryecs would be paying BR+0.6%.
The swap gives a saving of 1.2% (before bank charges).
Therefore they must end up paying BR + 0.6% – 1.2% = BR – 0.6%Because of swapping, they will borrow fixed at 4%. The will pay BR to the counterparty, so they will then be paying BR + 4%.
The end up paying BR – 0.6%, they must pay the balancing figure of 4.6% to the counterparty.Have you watched my free lecture on swaps?
Q4
The credit rating has been downgraded. Therefore investors will want a higher yield and the market value will fall.
Hi Thank you for answering my question.
however, i am not able to get the answer, could you help to look at my workings and comment where is the error part?Company | Buryecs | counterparty | Total
Actual | 4 % | BR + 0.4% | BR + 4.4%
Swap | BR + 0.6% | 5.8%
>>Swap | 5.8% | BR + 0.6% | BR + 6.4%Savings 2.0%
Variance | +1.2% | (1.2%)
Want | 3%(4%-1%saving) | BR – 0.6%(BR + 0.4% -1%saving)sorry for the mess working as the comment box doesnt show how my table was. have tried to adjust hope you able to understand. thanks again!
I ask again – have you watched my free lecture on swaps?!!
Without a swap, B would borrow at BR + 0.6% and the counterparty would borrow at 5.8%. So a total of BR + 6.4%
With the swap, B would borrow at 4% and the counterparty would borrow at BR + 0.4%. So a total of BR + 4.4%.
Therefore there is a saving of 2% to be made (before fees) and this is shared 1.2% to B and 0.8% to the counterparty.
Therefore B must end up paying 1.2% less than they would have paid without the swap i.e. BR + 0.6% – 1.2% = BR – 0.6%, and the counterpart must end up paying 0.6% less than they would have paid without the swap i.e. 5.8% – 0.8% = 5.0%.
The settling up can be done in various ways – which way does not matter for the exam, it is the final result that matters. I explain in my previous post how they are settling up in the examiners answer.
Again, I do suggest that you watch my free lectures on this.
Hi yes i have watched the free lecturer video. I have misunderstand at the rate both buryecs and counterparty wish to borrow at the initial part and therefore unable to get the figure. Thanks for the clear explanation and I’m able to get the figure now.
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