- August 17, 2020 at 5:34 pm #580949rummansaleemMember
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As per your free lecture, in swap agreement, we need to first calculate what the Company’s own borrowing would be and then we have to calculate the Swap borrowing rates and then we calculate the net saving on the swap agreement. Right?
but in some question i could not decide what the company own borrowing would be as it is not mention in the question either the company wants to borrow a fixed interest rate or floating interest rate. There is a question in Kaplan exam kit BURYECS CO (MAR/JUN 17), in which it is not mention any where either buryecs co want to borrow fixed interest rate or floating interest rate. kindly help me, how to judge what rate buryecs co want to borrow? Thanks in advance.August 18, 2020 at 8:57 am #580999John MoffatKeymaster
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Although most questions involving a swap make it clear whether they want fixed or floating, you are correct in saying that this isn’t the case in Buryecs.
However a swap can only be beneficial one way round. Here, if B borrows fixed and the counterparty borrows floating, the total interest is lower than if B borrows floating and the counterparty borrows fixed.
So that is how they will borrow, and will then swap the interest payments and share the saving.
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