Suppose that IBM would like to borrow $100m at fixed-rate, whereas GE would like to borrow $100m at floating-rate. IBM can borrow fixed-rate at 5.5% or floating-rate at LIBOR+0.25%. GE can borrow fixed-rate at 4,9% or floating rate at LIBOR+0.8%. In order to reduce the interest rate cost, IBM and GE enter into a interest rate SWAP with Big Bank (as intermediary). The net cost per year for IBM after the SWAP is $5.25m and for GE LIBOR + 0.4% ( Assume LIBOR = 4% and annual payments, BigBank pays to IBM LIBOR and receives from GE LIBOR).

Calculate the fixed interest rate that IBM pays to the Big Bank (annual) ? and the fixed interest rate that the Big Bank pays to GE (annual) ?

Calculate the TOTAL benefit for Big Bank if the swap has a maturity of 10 years

Draw the swap diagram