Company X wants to borrow $10,000,000 floating for 5 years; company Y wants to borrow $10,000,000 fixed for 5 years. Their external borrowing opportunities are shown here:

	Fixed-Rate		Floating-Rate
	Borrowing Cost		Borrowing Cost
Company X	10%		LIBOR
Company Y	12%		LIBOR + 1.5%

A swap bank proposes the following interest only swap: X will pay the swap bank annual payments on $10,000,000 with the coupon rate of LIBOR; in exchange the swap bank will pay to company X interest payments on $10,000,000 at a fixed rate of 10.05 percent. Y will pay the swap bank interest payments on $10,000,000 at a fixed rate of 10.30 percent and the swap bank will pay Y annual payments on $10,000,000 with the coupon rate of LIBOR 0.15 percent.

What is the value of this swap to the swap bank?

rev: 10_08_2020_QC_CS-232816

Multiple Choice

• The swap bank will earn 10 basis points per year on $10,000,000 = $10,000 per year.

• The swap bank will lose money.

• The swap bank will earn 40 basis points per year on $10,000,000 = $40,000 per year.

• none of the options