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How to calculate the six monthly interest rate if a vanilla interest rate is agreed?
In this case,would we be paying fixed in return for the floating rate from the counterparty?If yes,then is this correct
We pay 5.4/2=2.7
We receive Libor/2+0.6?Thanks in advance
No – the swap is against LIBOR.
So, to the bank (who is giving us the swap) we pay them 5.4%/2, and they pay us LIBOR/2.
We will pay the LIBOR/2 + 0.6% on our floating rate notes.
The net result is as follows:
We pay on our notes: LIBOR/2 + 0.6%
The bank pays us: LIBOR/2
We pay the bank: 5.4%/2 = 2.7%The total comes to 2.7% + 0.6% = 3.3%
Sir,
why do we use in last part of b) compound interest formula: (1+i)^2-1?
Why do not we just multiply 3,3% by 2 which give us 6,6%?
As for me – we should use compound interest if we accrue interest on interest+loan principal. But as far as I remember interest is normally accrued on principal of the loan only.
We always compound it. Its really because you are receiving half the interest earlier – it would be 6.6% if you are not getting any interest until the end of the year, but because you are getting half of it earlier it means the effective interest rate is a bit higher.
Thank you! I got the Idea it is based on the assumption that we will reinvest recieved interest at 3,3% rate…. Not sure whether it is correct…
Hi sir, does it mean that in plain vanilla swap katmai is exchanging only LIBOR for fixed interest rate because the 120 basis point is related to katmai’s credit rating?
And is the effective interest rate calculated in last part of b) katmai’s effective interest rate after the swap?
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