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Chapter 16

Example 6

A bank is currently quoting 12 months swap rates of 5.80 (bid) and 5.90 (ask).

(a) A Ltd has fixed rate loan at 6% but would like to swap to variable. It can
currently borrow at a variable rate of LIBOR + 0.25%.

Show A’s financial position if it enters into a swap with the bank.

(b) B Plc has a variable rate loan at LIBOR + 0.10% and would like to swap
to a fixed rate. It can currently borrow at a fixed rate of 6.05%.

Show B’s financial position if it enters into a swap with the bank.

Solution

(a)

Actual borrowing (6.00%)

Pay bank (LIBOR)

Receipt from bank (bid rate) 5.80

Net interest rate after the swap (LIBOR + 0.20%)

Open market cost – no swap (LIBOR + 0.25%)

Saving 0.05% or 5 basis points

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