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Companies A and B have been offered the following rates per annum on a $20 million
Chapter 7, Problem 7.1(choose chapter or problem)
Companies A and B have been offered the following rates per annum on a $20 million 5-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 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.
Questions & Answers
QUESTION:
Companies A and B have been offered the following rates per annum on a $20 million 5-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 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.
ANSWER:Step 1 of 3
Floating rate loan can be defined as that loan in which the interest rate of loan keeps on changing. In such a type of loan, interest rate is usually linked to a benchmark rate and as the benchmark rate changes then interest rate also changes.