allows a firm to convert outstanding fixed rate debt to floating rate debt.
Added by Jenny Z.
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This instrument is known as an interest rate swap. Show more…
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A bank finds that its assets are not matched with its liabilities. It is taking floating-rate deposits and making fixed-rate loans. How can swaps be used to offset the risk?
Your firm has issued at par value a floating rate bond paying an interest rate of LIBOR + 1%. Interest rate swaps to exchange LIBOR for a fixed swap rate are available with prices of 6% bid or 6.1% asked. If you use the swap to convert your issued bond into synthetic fixed rate debt, what will be the effective interest rate on that debt?
Akash M.
Companies A and B have been offered the following rates per annum on a $$\$ 20$$ million five-year loan: $$ \begin{array}{lcc} \hline & \text { Fixed rate } & \text { Floating rate } \\ \hline \text { Company A } & 5.0 \% & \text { LIBOR }+0.1 \% \\ \text { Company B } & 6.4 \% & \text { LIBOR }+0.6 \% \\ \hline \end{array} $$ Company A requires a floating-rate loan; Company $\mathrm{B}$ requires a fixed-rate loan. Design a swap that will net a bank, acting as intermediary, $0.1 \%$ per annum and that will appear equally attractive to both companies.
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