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Assume the following swap terms: Bank A Bank B Pay 10% LIBOR - 0.6% Receive LIBOR -0.6% 10% Assuming a notional principal of

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Answer #1

If LIBOR is 10.6%

Bank A  
interest is paid    -10.00%
transaction of swap  
pay dealer fixed interest   -10.00%
receive LIBOR-0.6%= 10.6%-0.6%=   10.00%
  
Net interest (Sum of all transactions) =   0.00%
Notional amount   $10,000,000
Year=   1
Interest = Notional amount * Net interest * t  
$10,000,000   *0%*1
$0.00  
So Net interest for swap transaction is   $0.00
  
Bank B  
interest is paid LIBOR-0.6%= 10.6%-0.6%=   -10.00%
Bank B  
interest is paid LIBOR-0.6%= 10.6%-0.6%=   -10.00%
receive    10.00%
  
Net interest (Sum of all transactions) =   0.00%
Notional amount   $10,000,000
Year=   1
Interest = Notional amount * Net interest * t  
$10,000,000   *0%*1
$0.00  
So Net interest of swap transaction is   $0.00
  
  

If LIBOR is9%
   Bank A  
interest is paid    -10.00%
transaction of swap  
pay dealer fixed interest   -10.00%
receive LIBOR-0.6%= 9%-0.6%=   8.40%
  
Net interest (Sum of all transactions) =   -1.60%
Notional amount   $10,000,000
Year=   1
Interest = Notional amount * Net interest * t  
$10,000,000   *-1.6%*1
-$160,000.00  
So Net interest for swap transaction is   -$160,000.00
  
  
Bank B  
interest is paid LIBOR-0.6%= 9%-0.6%=   -8.40%
receive    10.00%
  
Net interest (Sum of all transactions) =   1.60%
Notional amount   $10,000,000
Year=   1
Interest = Notional amount * Net interest * t  
$10,000,000   *1.6%*1
$160,000.00  
So Net interest of swap transaction is   $160,000.00
  

If LIBOR is 12%

Bank A

transaction of swap

pay dealer fixed interest -10.00%

receive LIBOR-0.6%= 12%-0.6%= 11.40%

Net interest (Sum of all transactions) = 1.40%

Notional amount $10,000,000

Year= 1

Interest = Notional amount * Net interest * t

$10,000,000 *1.4%*1

$140,000.00

So Net interest for swap transaction is $140,000.00

Bank B

interest is paid LIBOR-0.6%= 12%-0.6%= -11.40%

receive 10.00%

Net interest (Sum of all transactions) = -1.40%

Notional amount $10,000,000

Year= 1

Interest = Notional amount * Net interest * t

$10,000,000 *-1.4%*1

-$140,000.00

So Net interest of swap transaction is -$140,000.00

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