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

question 89

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 here: $$\begin{array} { c c c } & \text { Fixed-Rate } & \text { Floating-Rate } \\&\text { Borrowing Cost } & \text { Bortowing Cost } \\\text { Compary X } & 10 \% & \text { LIBOR } \\\text { Compary Y } & 12 \% & \text { LIBOR } + 1.5 \%\end{array}$$ A swap bank proposes the following interest only swap:
X will pay the swap bank annual payments on $10,000,000 with the coupon rate of LIBOR ? 0.15 percent; in exchange the swap bank will pay to company X interest payments on $10,000,000 at a fixed rate of 9.90 percent.Y will pay the swap bank interest payments on $10,000,000 at a fixed rate of 10.30 percent and the swap bank will pay Y annual payments on $10,000,000 with the coupon rate of LIBOR ? 0.15 percent. What is the value of this swap to the swap bank?

• A)The swap bank will lose money on the deal.
• B)The swap bank will earn 40 basis points per year on $10,000,000 = $40,000 per year.
• C)The swap bank will break even.
• D)none of the options

---

Definitions:

Debt

Money that is owed or due to be paid to someone else, typically as loans or bonds.

Time Value

The concept that money available at the present time is worth more than the same amount in the future due to its potential earning capacity.

Option's Market Price

The prevailing price at which an options contract is traded on the market, determined by factors like intrinsic value and time value.

Intrinsic Value

The actual worth of an asset or investment based on its fundamental characteristics, independent of its market value.