Reference no: EM132491316
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
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.
Does the swap bank make any money in this set of swap deals? What is the value of this swap to the swap bank annually in basis points? In dollars?