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Hello
For this question the answer part b
The receive yield from bank is shwon as yield.. I did not understand.. I read the article on the website and understood part a .. I read your responses regarding this to many students on this site and understood other parts .. but the one thing that I do not understand is .. the yield that we receive.. from bank.. it is supposed to be variable amount based on current yield curve rate .. so what does it mean we pay fixed rate and instead receive variable rate from bank.. so what variable rate do we receive.. I do not understand the first line of the answer also .. borrow at yield plus 60 bp . .Please tell me the date of the exam. I am sorry but I cannot remember the name of every question there has ever been 🙂
At present they are not making a swap and are paying floating rate interest based on the spot yield curve plus 60 basis points. One basis point is 0.01% so they are currently paying spot yield curve rate plus 0.60%.
I they agree to the swap, then they will pay fixed interest to Ratus Bank of 3.7625% and will receive from Ratus Bank variable interest based on the spot yield curve rates (for an annual fee of 0.20%).
So the end net result of swapping will be that they will be paying fixed interest to Ratus instead of the floating interest on the bond that they are currently having to pay.At present they are not making a swap and are paying floating rate interest based on the spot yield curve plus 60 basis points. One basis point is 0.01% so they are currently paying spot yield curve rate plus 0.60%.
I they agree to the swap, then they will pay fixed interest to Ratus Bank of 3.7625% and will receive from Ratus Bank variable interest based on the spot yield curve rates (for an annual fee of 0.20%).
So the end net result of swapping will be that they will be paying fixed interest to Ratus instead of the floating interest on the bond that they are currently having to pay.
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