An Example of an Interest Rate Swap %of$10,00000 Here's what's in it for Bank a $50,000. Thats quite a Swat p They can borrow externally at cost savings per year for Bank 10% fixed and have a net years 103/8% borrowing position of LIBOR-1/8% 103/8+10+( LIBOR-1/8)= Bank LIBOR-2% which is 72% 10 better than they can borrow A floating without a swap COMPANY B BANK A DIFFERENTIAL Fixed rate 11.75% 1.75% Floating rate LIBOR +5% LIBOR OSD 1.25% McGraw-Hilylrwoin 10-10 Copyright@ 2001 by The McGraw-Hill Companies, Inc. All rights
McGraw-Hill/Irwin Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved. 10-10 10 3/8% LIBOR – 1/8% An Example of an Interest Rate Swap Bank A Swap Bank Here’s what’s in it for Bank A: They can borrow externally at 10% fixed and have a net borrowing position of -10 3/8 + 10 + (LIBOR – 1/8) = LIBOR – ½ % which is ½ % better than they can borrow floating without a swap. COMPANY B BANK A DIFFERENTIAL Fixed rate 11.75% 10% 1.75% Floating rate LIBOR + .5% LIBOR .5% QSD = 1.25% 10% ½ % of $10,000,000 = $50,000. That’s quite a cost savings per year for 5 years
An Example of an Interest Rate Swap The swap bank makes this Swap offer to company B: You pay us 10 72% per year on Bank 10%% $10 million for 5 years LIBOR-14% and we will pay you LIBOR-4% per year on Company $10 million for 5 years B COMPANY B BANK A DIFFERENTIAL Fixed rate 11.75% 10 1.75% Floating rate LIBOR +.5% LIBOR OSD 1.25% McGraw-Hilylrwoin 10-11 Copyright@ 2001 by The McGraw-Hill Companies, Inc. All rights
McGraw-Hill/Irwin Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved. 10-11 LIBOR – ¼% 10 ½% An Example of an Interest Rate Swap Swap Bank Company B The swap bank makes this offer to company B: You pay us 10 ½ % per year on $10 million for 5 years and we will pay you LIBOR – ¼ % per year on $10 million for 5 years. COMPANY B BANK A DIFFERENTIAL Fixed rate 11.75% 10% 1.75% Floating rate LIBOR + .5% LIBOR .5% QSD = 1.25%