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

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 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

Quizplus · Accepted Answer

The swap bank's profit can be calculated as the difference between the fixed rate paid by X (9.90%) and the fixed rate received from Y (10.30%), which is 40 basis points. The notional amount of $10,000,000 is irrelevant for this calculation. Therefore, the swap bank will earn $40,000 per year.

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