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

question 69

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: A swap bank proposes the following interest only swap: Y will pay the swap bank annual payments on $10,000,000 with a fixed rate of rate of 9.90%.in exchange the swap bank will pay to company Y interest payments on $10,000,000 at LIBOR - 0.15%; What is the value of this swap to company Y?

• A)Company Y will save 15 basis points per year on $10,000,000 = $15,000 per year.
• B)Company Y will save 45 basis points per year on $10,000,000 = $45,000 per year.
• C)Company Y will save 5 basis points per year on $10,000,000 = $5,000 per year.
• D)Company Y will only break even on the deal.

---

Definitions:

Exclusive Contracts

Agreements that restrict individuals or entities to engage or transact with only one party, commonly seen in professional sports and the entertainment industry.

Adhesion Contract

A standard-form contract prepared by one party, with little or no negotiation with the weaker party, often in situations where the choices or bargaining power is limited.

Vaudeville Star

A performer who was popular on the vaudeville circuit, a series of variety entertainment shows in the late 19th and early 20th centuries.

The Jazz Singer

The first feature-length motion picture with synchronized dialogue sequences, marking a pivotal moment in the transition from silent to sound films.