Suppose That a Fixed-Rate Borrower (A)has to Repay $50 Million

question 78

Essay

Suppose that a fixed-rate borrower (A)has to repay $50 million at an interest rate of 5% p.a., and a floating-rate borrower (B)has to repay $50 million at rates similar to the BBSW.These parties enter into a two-quarter swap arrangement with an agreed principal of $50 million and a swap rate of 5% per annum.At the commencement of each quarter, the BBSW rates are 4% and 5.75% p.a.respectively.
A.Calculate the net settlement payments under the swap.(Use d/diy = 0.25)
B.Show how the fixed-rate borrower becomes a floating-rate payer.
C.Show how the floating-rate borrower becomes a fixed-rate payer.

---

Definitions:

Dividends

Payments made by a corporation to its shareholder members, usually derived from the company's earnings.

Consolidated Statement of Retained Earnings

A financial statement that shows the changes in a corporation's retained earnings over a specific period, combining the retained earnings of the parent company with those of its subsidiaries.

FVE Method

Refers to the Fair Value Evaluation method, a technique for assessing an asset's worth at its current market value.

Consolidated Net Income

The total amount of net income earned by a parent company and its subsidiaries, after intercompany transactions have been eliminated.