Company X Wants to Borrow $10,000,000 Floating for 5 Years;

question 76

Multiple Choice

Company X wants to borrow $10,000,000 floating for 5 years; company Y wants to borrow $10,000,000 fixed for 5 years.Their external borrowing opportunities are shown below: A swap bank proposes the following interest only swap: Y will pay the swap bank annual payments on $10,000,000 with a fixed rate of 9.90%.In exchange the swap bank will pay to company Y interest payments on $10,000,000 at LIBOR - 0.15%; What is the value of this swap to company Y?

• A)Company Y will save 15 basis points per year on $10,000,000 = $15,000 per year.
• B)Company Y will save 45 basis points per year on $10,000,000 = $45,000 per year.
• C)Company Y will save 5 basis points per year on $10,000,000 = $5,000 per year.
• D)Company Y will only break even on the deal.

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Definitions:

T-statistic

The T-statistic is a ratio used in hypothesis testing that compares the difference between an observed sample mean and a known value, to the standard error of the mean.

Null Hypothesis

A default hypothesis that there is no significant difference or effect, typically set against the alternative hypothesis in statistical testing.

Alpha

A coefficient used in statistics that represents the level of significance, often denoted as the probability of rejecting a true null hypothesis.

T-statistic

A type of statistic used in hypothesis testing, calculated to compare the mean of a sample to the known mean of the population.