Forums › Ask ACCA Tutor Forums › Ask the Tutor ACCA AFM Exams › Swaps

- This topic has 1 reply, 2 voices, and was last updated 1 year ago by John Moffat.

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- February 15, 2023 at 8:10 pm #678934
Hie Mr John

I don’t understand where they got the

Interest rate after swap for company Y which is

SOFR + 0.15%I understand for company X 5.65%

The questions goes like this:

Company X wishes to raise $50 million. It would prefer to issue fixed rate

debt and can borrow for one year at 6% fixed or SOFR + 80 points.

Company Y also wishes to raise $50 million and to pay interest at a

floating rate. It can borrow for one year at a fixed rate of 5% or at SOFR +

50 points.

Required:

Calculate the effective swap rate for each company – assume

savings are split equally.February 16, 2023 at 10:46 am #678955If X were to borrow fixed and Y were to borrow floating then in total the interest payable would be SOFR + 6.5%.

If on the other hand X were to borrow floating and Y was to borrow fixed (and then swapped the payments) then the total interest payable would be SOFT + 5.8%.

Therefore it will make sense to do the latter and swap because there would be a total saving of 0.7%, which if split equally would save them each 0.35%.

Without swapping, Y would have been paying SOFR + 0.5%. Therefore because of the saving through swapping of 0.35%, the swap would end up meaning that they would be paying SOFR + 0.5% – 0.35% = SOFR + 0.15%.

Have you watched my free lectures on swaps? 🙂

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