Purchase Solution

Interest Rate Swap

Not what you're looking for?

Ask Custom Question

As an assistant treasurer of a large corporation, your job is to look for ways your company can lock in its cost of borrowing in the financial market. The date is July 31. Your firm is taking out a loan of $200 million, with an annual interest rate of prime plus 5 percent and a maturity of 5 years. The current prime rate is 5 percent. You recommend that the firm engage in interest rate swap contract with SWAP Bank. According to the swap contract with the notional principal amount of $200 million, you should pay 5.4 percent fixed-rate to SWAP Bank and in return, receive prime rate from SWAP Bank. Payments are made every year (at the end of each year). If the prime rate at the end of 1st, 2nd, 3rd, 4th, and 5th year turns out 6%, 6.5%, 7%, 7%, and 6.8%, respectively, what should be the effective interest payment (i.e. interest payment on $200 million loan plus net payment from interest rate swap contract) at the end of 2nd year?

Purchase this Solution
Solution Summary

Sets up and answers a question on interest rate swap.

Solution Preview

Please see attached file:
As an assistant treasurer of a large corporation, your job is to look for ways your company can lock in its cost of borrowing in the financial market.  The date is July 31.  Your firm is taking out a loan of $200 million, with an annual interest rate of prime plus 5 percent and a maturity of 5 years. The current prime rate is 5 percent.  You recommend that the firm engage in interest ...

Purchase this Solution
Free BrainMass Quizzes
Business Ethics Awareness Strategy

This quiz is designed to assess your current ability for determining the characteristics of ethical behavior. It is essential that leaders, managers, and employees are able to distinguish between positive and negative ethical behavior. The quicker you assess a person's ethical tendency, the awareness empowers you to develop a strategy on how to interact with them.

Social Media: Pinterest

This quiz introduces basic concepts of Pinterest social media

Balance Sheet

The Fundamental Classified Balance Sheet. What to know to make it easy.

Team Development Strategies

This quiz will assess your knowledge of team-building processes, learning styles, and leadership methods. Team development is essential to creating and maintaining high performing teams.

Cost Concepts: Analyzing Costs in Managerial Accounting

This quiz gives students the opportunity to assess their knowledge of cost concepts used in managerial accounting such as opportunity costs, marginal costs, relevant costs and the benefits and relationships that derive from them.

View More Free Quizzes
Related BrainMass Solutions

  • Interest rate swaps

    c) What are the total interest savings available in this cross currency interest rate swap? d) Determine the fixed interest rate on Boing dollar debt that would make a swap no longer beneficial. Please see the attached file.

  • Plain vanilla, two-year interest rate swap

    interest rate swap.

  • Interest Rate Swap for Fixed Payment Side

    266615 Interest Rate Swap for Fixed Payment Side There is a 2 year swap contract (fix to float) signed on the swap rate of 5%; Interest will be exchanged every half year.

  • Swaps in the Commercial Bank

    249178 Swaps in the Commercial Bank A commercial bank agrees to pay a swap dealer a floating rate of interest on a $100 million in exchange for payment by the swap dealer to the bank of a fixed rate of interest on $100 million.

  • Slidell Company Derivatives: Accounting for Swaps

    In conjunction with this loan, Slidell enters into an interest rate swap agreement to receive a swap payment (based on $500,000) if the January 1, 2016, interest rate is greater than 7% and will make a swap payment if the rate is less than 7%.

  • Interest Rate Swap

    from swap decrease Sets up a fixed rate for floating rate interest rate swap.

  • Interest Rate Swap

    from swap decrease Sets up a fixed rate for floating rate interest rate swap.

  • Interest rate risk and swaps for commercial banks

    This will be acceptable to both the parties as per the following calculation: Commercial Bank: Liability rate : 9% Less: Swap in Rate: 9.5% Add: Swap out rate: T Bill + 1% Net financing rate: T Bill + .5% If we reduce it from interest yield

  • Comparing Currency Swaps, Interest Rate Swaps and Equity Swaps

    Interest rate swaps: In an interest rate swap, two parties agree to pay a set of cash flows based on a certain principal amount. While the principal amount is fixed, interest payments vary based on the interest rate.

View More Related Solutions