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

question 96

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; 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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Definitions:

Basal Metabolic Rate

The minimum rate of energy expenditure per unit time by endothermic animals at rest.

Energy Expenditure

The total amount of energy used by the body for metabolic processes, physical activity, and maintaining bodily functions.

Resting Rate

Typically refers to the resting heart rate, which is the number of heartbeats per minute while a person is at rest, indicating overall heart health and fitness level.

Achievement Motivation

The drive or desire within an individual to attain goals or reach a certain standard of excellence.