Swaps
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An insurance company owns $50 million of floating-rate bonds yielding LIBOR plus 1 percent. These loans are financed by $50 million of fixed-rate guaranteed investment contracts (GICs) costing 10 percent. A finance company has $50 million of auto loans with a fixed rate of 14 percent. They are financed by $50 million of debt with a variable rate of LIBOR plus 4 percent. If the finance company is going to be the swap buyer and the insurance company the swap seller, what is an example of a feasible swap?
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Solution Summary
Solution constructs a floating for fixed interest rate swap.
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An insurance company owns $50 million of floating-rate bonds yielding LIBOR plus 1 percent. These loans are financed by $50 million of fixed-rate guaranteed investment contracts (GICs) costing 10 percent. A finance company has $50 million of auto loans with a fixed rate of 14 percent. They are financed by $50 million of debt with a variable rate of LIBOR plus 4 percent. If the finance company is going to be the swap buyer and the insurance company the swap seller, what is an example of a feasible swap?
According to the market convention, the counterparty that pays the fixed rate (while receiving the floating rate) is called the "buyer", and the counterparty that receives the fixed rate (while paying the floating rate) is called the "seller". Finance company, ...
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