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

question 55

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: $$\begin{array} { l c l } & \begin{array} { l } \text { Fixed-Rate Borrowing } \\\text { Cost }\end{array} & \begin{array} { l } \text { Floating-Rate } \\\text { Borrowing Cost }\end{array} \\\hline \text { Company X } & 10 \% & \text { LIBOR } \\\text { Company Y } & 12 \% & \text { LIBOR } + 1.5 \%\end{array}$$ 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%; in exchange the swap bank will pay to company X interest payments on $10,000,000 at a fixed rate of 9.90%.Y will pay the swap bank interest payments on $10,000,000 at a fixed rate of 10.30% and the swap bank will pay Y annual payments on $10,000,000 with the coupon rate of LIBOR - 0.15%. 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 above

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Definitions:

The Funeral Rule

A regulation enforced by the Federal Trade Commission that requires funeral providers to give consumers accurate, itemized price information and other specific disclosures about funeral goods and services.

Funeral's Expense

The costs incurred for the services and goods associated with the burial or cremation of deceased individuals.

Telephone Consumer Protection Act of 1991

A federal law that restricts telemarketing calls, the use of automated telephone equipment, and other forms of telephone-based marketing.

Prerecorded Voice

Involves automated messages delivered via telephone without the need for a live speaker.