Swaps

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October 30, 2019 at 1:22 am #551177
ishan777
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P3 mock question help

H has a loan borrowed at LIB+4%
H would prefer fixed rate at 8%

J pays fixed at 9%
Prefers to pay variable at LIB+1%

Bank will require 10% of savings from the swap, H and J will share the remaining equally.
Calculate Hs effective rate of interest as a result.

I found the spread here as 2% but do not know how to proceed further.
Please assist.
October 30, 2019 at 11:11 am #551228
Ken Garrett
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Now they pay L + 4 + 9 = L + 13

After swap they would pay 8 + L + 1 = L + 9

Saving is 4%, of whichmthe bank wants 10%, so net is 3.6, or 1.8 each.

Therefore, H will pay 8 – 1.8 = 6.2.
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