Interest Swaps
International Financial Management
Review on Swaps, Solution
1. The term interest rate swap
A. refers to a "single-currency interest rate swap" shortened to "interest rate swap"
B. involves "counterparties" who make a contractual agreement to exchange cash flows at periodic intervals
C. can be "fixed-for-floating rate" or "fixed-for-fixed rate"
D. All of the above
2. Suppose the quote for a five-year swap with semiannual payments is 8.50—8.60 percent. The means:
A. The swap bank will pay semiannual fixed-rate dollar payments of 8.50 percent against receiving six-month dollar LIBOR.
B. The swap bank will receive semiannual fixed-rate dollar payments of 8.60 percent against paying six-month dollar LIBOR.
C. a) and b)
D. none of the above 3. 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%.
What is the value of this swap to company X?
A. Company X will lose money on the deal.
B. Company X will save 25 basis points per year on $10,000,000 = $25,000 per year.
C. Company X will only break even on the deal
D. Company X will save 5 basis points per year on $10,000,000 = $5,000 per year
Company X will borrow $10,000,000 at 10% external to the swap (re-read the question—X needs to raise $10,000,000 and prefers to do it at a floating rate). X 's all-in-cost will be: 10% + (LIBOR - .15%) - 9.90% = LIBOR - 0.05%. This represents a savings of 5 basis points over their opportunity to borrow at LIBOR.
4. 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
Review on Swaps, Solution
1. The term interest rate swap
A. refers to a "single-currency interest rate swap" shortened to "interest rate swap"
B. involves "counterparties" who make a contractual agreement to exchange cash flows at periodic intervals
C. can be "fixed-for-floating rate" or "fixed-for-fixed rate"
D. All of the above
2. Suppose the quote for a five-year swap with semiannual payments is 8.50—8.60 percent. The means:
A. The swap bank will pay semiannual fixed-rate dollar payments of 8.50 percent against receiving six-month dollar LIBOR.
B. The swap bank will receive semiannual fixed-rate dollar payments of 8.60 percent against paying six-month dollar LIBOR.
C. a) and b)
D. none of the above 3. 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%.
What is the value of this swap to company X?
A. Company X will lose money on the deal.
B. Company X will save 25 basis points per year on $10,000,000 = $25,000 per year.
C. Company X will only break even on the deal
D. Company X will save 5 basis points per year on $10,000,000 = $5,000 per year
Company X will borrow $10,000,000 at 10% external to the swap (re-read the question—X needs to raise $10,000,000 and prefers to do it at a floating rate). X 's all-in-cost will be: 10% + (LIBOR - .15%) - 9.90% = LIBOR - 0.05%. This represents a savings of 5 basis points over their opportunity to borrow at LIBOR.
4. 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