interest rate swaps

R

rbcc

Junior Member
Joined
Nov 18, 2009
Messages
126
Hi,

I have a question about swaps

Company A can borrow at LIBOR+4% reset semi-annually

Company B can borrow at 4% per year

Company A and B enter into a 2 year interest rate swap. Notional value 4.0 million. Company A pays 6% fixed. Company B pays LIBOR+2%.

Calculate the interest rate swap net payments for company A.

I get the fixed pay % would be 3%( 6%/2). But I don't understand how the floating pay % is calculated can some one explain this?

Thanks
rbcc
 
rbcc said:
Hi,

I have a question about swaps

Company A can borrow at LIBOR+4% reset semi-annually

Company B can borrow at 4% per year

Company A and B enter into a 2 year interest rate swap. Notional value 4.0 million. Company A pays 6% fixed. Company B pays LIBOR+2%.

Calculate the interest rate swap net payments for company A.

I get the fixed pay % would be 3%( 6%/2). But I don't understand how the floating pay % is calculated can some one explain this?

Thanks
rbcc
Click to expand...
"Interest rate swap net payment" looks like a technical term, and I do not have the definition. So what I am about to say may not be helpful.
First, what company A receives on the swap is not known in advance for future periods because it is determined by what LIBOR will be in those periods. So I am guessing that the question is not asking for a numeric answer if "interest rate swap net payment" means the net payment due on the swap alone. There is however an algebraic answer.
Second, maybe the question is what does company A pay for its borrowing given the interest rate swap. That does have a numeric answer because company A is paying LIBOR on its borrowing and receiving LIBOR on the swap so LIBOR effectively drops out of the calculation.
Sorry if this is not helpful.
 
oh sorry guys I forgot to post the LIBOR rate in the first year LIBOR is expected to be
4%
 
I'm still not sure that I know what the question is.

With regard to the swap alone, Company A pays (.06/2) * 4M semi-annually, right? Company A receives [(L + .02)/2] * 4M, right? So net it pays (receives)
{[.06 - (L + .02)]/2} * 4M = [(.04 - L)/2] * 4M. If L = .04, then what?

Company A pays semi-annually [(L + .04)/2] * 4M on the borrowing alone. So its total net payment, taking the borrowing and the swap into account =
{[(L + .04) + (.04 - L)]/2} * 4M = .16M.
The effect of the swap is to FIX the effective payment due on the variable-rate borrowing. The value of L is irrelevant.
 
You must log in or register to reply here.
Top