Company X Wants to Borrow $10,000,000 Floating for 5 Years;A Swap Bank Proposes the Following Interest Only Swap: X

The Answer of Company X Wants to Borrow $10,000,000 Floating for 5 Years;A Swap Bank Proposes the Following Interest Only Swap: X

Company X Wants to Borrow $10,000,000 Floating for 5 Years;A Swap Bank Proposes the Following Interest Only Swap: X

The Answer of Company X Wants to Borrow $10,000,000 Floating for 5 Years;A Swap Bank Proposes the Following Interest Only Swap: X

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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%. $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 = $10,000 per year. C) The swap bank will LOSE money. D) None of the above$ What is the value of this swap to the swap bank?

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Definitions:

Futures Price

Futures Price is the agreed-upon price for the purchase or sale of a particular asset at a future date, determined in the futures market.

Stock Index Futures

Futures contracts to buy or sell a specific stock index at a predetermined price on a specified future date, used for hedging or speculating on the direction of the stock market.

Multiplier

A concept in economics referring to the factor by which a change in investment, government spending, or other economic activity results in a larger change in the gross domestic product (GDP).

Dollars

A unit of currency used in the United States and other countries, symbolized as $.