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

question 73

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: $$\begin{array} { l l l } & \begin{array} { l } \text { Fixed-Rate Borrowing } \\\text { Cost }\end{array} & \begin{array} { l } \text { Floating-Rate } \\\text { Borrowing Cost }\end{array} \\\hline \text { Company X } & 10 \% & \text { LIBOR } \\\text { Company Y } & 12 \% & \text { LIBOR } + 1.5 \%\end{array}$$ 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%. What is the value of this swap to company X?

• A)Company X will lose money on the deal.
• B)Company X will save 25 basis points per year on $10,000,000 = $25,000 per year.
• C)Company X will only break even on the deal.
• D)Company X will save 5 basis points per year on $10,000,000 = $5,000 per year.

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Definitions:

Dependent Personality

A personality disorder marked by pervasive psychological dependence on others to meet emotional and physical needs.

Detachment Category

A classification in psychology used to describe a level of emotional disconnection from a person or situation.

DSM-5

The Diagnostic and Statistical Manual of Mental Disorders, Fifth Edition, a comprehensive classification of mental disorders published by the American Psychiatric Association.

Anxiousness

An emotion of concern, apprehension, or discomfort regarding an event whose result is not yet known.