19. Interest-rate swaps (S27-6) A year ago, a bank entered into a $50 million five-year interest rate
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19. Interest-rate swaps (S27-6) A year ago, a bank entered into a $50 million five-year interest rate swap. It agreed to pay company A each year a fixed rate of 6% and to receive in return SOFR. When the bank entered into this swap, SOFR was 5%, but now interest rates have risen, so on a four-year interest rate swap the bank could expect to pay 6.5% and receive SOFR.
a. Is the swap showing a profit or loss to the bank?
b. Suppose that at this point company A approaches the bank and asks to terminate the swap.
If there are four annual payments still remaining, how much should the bank charge A to terminate?
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Related Book For
Principles Of Corporate Finance
ISBN: 9781264080946
14th Edition
Authors: Richard Brealey, Stewart Myers, Franklin Allen, Alex Edmans
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