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 here: $$\begin{array} { c c c }
& \text { Fixed-Rate } & \text { Floating-Rate } \
&\text { Borrowing Cost } & \text { Bortowing Cost } \
\text { Compary X } & 10 \% & \text { LIBOR } \
\text { Compary Y } & 12 \% & \text { LIBOR } + 1.5 \%
\end{array}$$ 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 percent.Y will pay the swap bank interest payments on $10,000,000 at a fixed rate of 10.30 percent and the swap bank will pay Y annual payments on $10,000,000 with the coupon rate of LIBOR ? 0.15 percent. 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 options

Question

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 here: $$\begin{array} { c c c } 
& \text { Fixed-Rate } & \text { Floating-Rate } \
&\text { Borrowing Cost } & \text { Bortowing Cost } \
\text { Compary X } & 10 \% & \text { LIBOR } \
\text { Compary Y } & 12 \% & \text { LIBOR } + 1.5 \%
\end{array}$$ 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 percent.Y will pay the swap bank interest payments on $10,000,000 at a fixed rate of 10.30 percent and the swap bank will pay Y annual payments on $10,000,000 with the coupon rate of LIBOR ? 0.15 percent.  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 options

Quizplus · Accepted Answer

The Answer of 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 here: $$\begin{array} { c c c } 
& \text { Fixed-Rate } & \text { Floating-Rate } \
&\text { Borrowing Cost } & \text { Bortowing Cost } \
\text { Compary X } & 10 \% & \text { LIBOR } \
\text { Compary Y } & 12 \% & \text { LIBOR } + 1.5 \%
\end{array}$$ 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 percent.Y will pay the swap bank interest payments on $10,000,000 at a fixed rate of 10.30 percent and the swap bank will pay Y annual payments on $10,000,000 with the coupon rate of LIBOR ? 0.15 percent.  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 options

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