10. Company JKL can borrow on fixed interest terms at 6% per annum and floating rate terms at Libor + 2% per annum. Company MNO is unable to raise fixed rate finance directly in the market but is able to borrow at Libor + 5% per annum. An investment bank acting as an intermediary can introduce MNO to JKL to arrange an interest rate swap and hence obtain fixed rate finance that way. The investment bank charges each counterparty 0.25% per annum of the amount swapped for the duration of the swap. If JKL requires a net saving after charges of at least 1% per annum on its floating rate finance: a) Calculate the minimum rate at which fixed rate finance could be offered to MNO via the swap contract. [4 marks] b) Draw a payment stream diagram showing how the contract operates. [4 marks] c) Discuss whether JKL could increase the fixed rate and hence increase its advantage under the swap. [2 marks] [Total 10 marks] 10. Company JKL can borrow on fixed interest terms at 6% per annum and floating rate terms at Libor + 2% per annum. Company MNO is unable to raise fixed rate finance directly in the market but is able to borrow at Libor + 5% per annum. An investment bank acting as an intermediary can introduce MNO to JKL to arrange an interest rate swap and hence obtain fixed rate finance that way. The investment bank charges each counterparty 0.25% per annum of the amount swapped for the duration of the swap. If JKL requires a net saving after charges of at least 1% per annum on its floating rate finance: a) Calculate the minimum rate at which fixed rate finance could be offered to MNO via the swap contract. [4 marks] b) Draw a payment stream diagram showing how the contract operates. [4 marks] c) Discuss whether JKL could increase the fixed rate and hence increase its advantage under the swap. [2 marks] [Total 10 marks]