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Assume that you have an outstanding 100M loan with your bank under which you pay 5%...

Assume that you have an outstanding 100M loan with your bank under which you pay 5% fixed rate. Assume also that you have entered into a swap agreement for a notional of 100M USD under which every 6 months you agree to pay LIBOR and receive 4% fixed. On the date you signed the contract LIBOR is 3%. The exchange of payments under the swap have the effect of modifying your liabilities so that

A. you end up having a loan that costs 4% fixed rate

B. you end up having a loan that costs 6% fixed rate

C. you end up having a loan that costs LIBOR+100bps floating rate

D. you end up having a loan that costs LIBOR-100bps floating rate

Asnwer is C, please list detailed solution

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Answer #1

You will pay ínterest on loan    fixed -5%  
transaction with Swap dealer      
you will pay dealer LIBOR that is   -LIBOR  
(Payment is outflow so negative sign is used)      
      
Dealer will pay and you will receive    fixed +4%  
Net interest = -5%-LIBOR+4%      
-1%- LIBOR      
So Net effect is that you end up with 1% or 100 basis points + LIBOR flotaing rated loan       
      

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