Question

Assume that you have an outstanding 100M loan with your bank under which you pay 5% fixed rate. Assume also that you have entered into a swap agreement for a notional of 100M USD under which every 6 months you agree to pay LIBOR and receive 4% fixed. On the date you signed the contract LIBOR is 3%. The exchange of payments under the swap have the effect of modifying your liabilities so that a. you end up having a loan that costs LIBOR - 100 bps floating rate. b. you end up having a loan that costs LIBOR 100 bps floating rate. c. you end up having a loan that costs 4% fixed rate. d. you end up having a loan that costs 6% fixed rate.

Answer 1

Answer:

You will end up with 1% or 100 basis points + LIBOR floating rated loan      

Explanation:

You will have to pay interest on loan at a fixed rate of -5%  

transaction with the Swap dealer      

you will have to pay dealer LIBOR that is   -LIBOR  

(Payment is to be outflow so the negative sign is used)      

     

Dealer will pay and you will receive    fixed +4%  

Net interest = -5%-LIBOR+4%      

-1%- LIBOR      

So the Net effect is that you will end up with 1% or 100 basis points + LIBOR floating rated loan