Question

Companies X and Y have been offered the following rates per year on a $5 million investments. Company X requires a fixed-rate investment; company Y requires a floating-rate investment. Design a swap that will net a bank, acting as intermediary, 0.2% per year and which will appear to be equally attractive to X and Y.

                        _______________________________________________

                                                            Fixed Rate                  Floating Rate

                           Company X                 8.0%                               LIBOR

                           Company Y                 8.8%                               LIBOR

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*LIBOR: London Inter-Bank Offered Rate

Answer 1

Company	Fixed Rate	Floating rate	Preference
X	8%	LIBOR	Fixed
Y	8.80%	LIBOR	Floating
Inter Bank activity
Company	Rates received	Rates payable
X	LIBOR	8%
Y	8.80%	LIBOR
Total	LIBOR + 8.8%	LIBOR + 8%
Spread available with bank	0.80%
Commision kept by bank	0.20%
Remaining spread	0.60%
Equally distributed in X and Y	0.30%
Rates payable by each company
	Paid to Inter-Bank	Commission	Net rates available
X	LIBOR	0.30%	LIBOR -0.3%
Y	8.80%	0.30%	8.30%