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

question 53

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: 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:

Current Assets

Assets that are expected to be converted into cash, sold, or consumed within a year or less, including stocks, receivables, and inventory.

Current Asset

Short-term assets that are expected to be converted into cash within one year or within the business's operating cycle.

Shareholders' Equity

Refers to the residual interest in the assets of a corporation after deducting liabilities, indicating the net worth available to shareholders.