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

question 80

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: $$\begin{array} { l l l } & \begin{array} { l } \text { Fixed-Rate Borrowing } \\\text { Cost }\end{array} & \begin{array} { l } \text { Floating-Rate Borrowing } \\\text { Cost }\end{array} \\\hline \text { Company X } & 10 \% & \mathrm { LIBOR } \\\text { Company Y } & 12 \% & \mathrm { LIBOR } + 1.5 \%\end{array}$$ 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; in exchange the swap bank will pay to company X interest payments on $10,000,000 at a fixed rate of 10.05%.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 earn 40 basis points per year on $10,000,000 = $40,000 per year.
• B)The swap bank will earn 10 basis points per year on $10,000,000 = $10,000 per year.
• C)The swap bank will LOSE money.
• D)None of the above

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Specialty

A particular branch of medicine or surgery in which a doctor has undergone advanced training and gained expertise.

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High-Performance Incentive Program, a strategy designed to improve efficiency and outcomes through incentives.