Question
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
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 0.15 percent; in exchange the swap bank will pay to company X interest payments on $10,000,000 at a fixed rate of 9.90 percent. What is the value of this swap to company X?
Company X will save 25 basis points per year on $10,000,000 = $25,000 per year. | ||
Company X will only break even on the deal. | ||
Company X will save 5 basis points per year on $10,000,000 = $5,000 per year. | ||
Company X will lose money on the deal. |
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