Third National Bank has made 10-year, $25 million fixed-rate loan at 12%. Annual
Interest payments are $3 million, and all principal will be repaid in year 10. The bank wants to swap the fixed interest payments into floating-rate payments. If the bank could borrow at a fixed rate of 10% for 10 years, what is the notional principal of the swap?

Question

Quizplus · Accepted Answer

To calculate the notional principal of the swap, we need to equate the present value of the fixed-rate payments (PVfixed) with the present value of the floating-rate payments (PVfloating). We can assume that the floating-rate payments will be based on an index such as LIBOR.

PVfixed = PVfloating
$3 million / 0.12 = PVfloating / 0.10

PVfloating = ($3 million / 0.12) x 0.10 = $25 million

Therefore, the notional principal of the swap is $25 million, which is the same as the principal of the original loan.

Third National Bank Has Made 10-Year, $25 Million Fixed-Rate Loan