You can borrow funds for five years at 7%. If you enter into a five-year swap...
- You can borrow funds for five years at 7%. If you enter into a five-year swap to receive a fixed swap rate of 7.5% in the exchange of paying LIBOR, what rate of interest as a net effect can you transform to by using the swap?
A) 6.5% B) LIBOR-0.5% C) LIBOR+0.5% D) No change
Homework Answers
On current fund, interest rate paid = 7%
If the swap is taken, interest rate paid = LIBOR
Interest rate received = 7.5%
So, total interest rate form the net effect of swap = (interest rate paid - interest raid received) = (7% + LIBOR - 7.5%)
So, effective rate = LIBOR - 0.50%
total interest rate form the net effect of swap = LIBOR - 0.50%. Option B is correct.
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