Question

Given an issued 10 year FRN for 100 million notional at 3M LIBOR + 25bps, what type of IRS can be used to convert this exposure to a fixed rate? Given a quote for this 10 year swap with a 7.5% fixed leg, and current LIBOR at 3.5%, what is the first net payment on the IRS + FRN? Assume quarterly payments at 90/360 day-count basis.

Answer 1

ANSWER:

Interest rate swap ( Generic swaps) should be used to convert floating/flexible interest rate payment to fixed interest rate payment

Notional principal = 100 Million

Interest rate = 3 months LIBOR + 25 bps

Fixed interest rate = 7.5%

Current LIBOR = 3.5%

Current floating rate = 3.75%

Net payment to swap party

= 100,000,000 × (0.075 - 0.0375)× 90/360

= $ 9,37,500

First net payment on swap = $ 9,37,500

( This is net payment in swap transaction i.e over and above the interest payment to the ender )

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