Question

Company X and Company Y have been offered the following rates

	Fixed Rate	Floating Rate
Company X	3.5%	3-month LIBOR plus 10bp
Company Y	4.5%	3-month LIBOR plus 30 bp

Suppose that Company X borrows fixed and company Y borrows floating. If they enter into a swap with each other where the apparent benefits are shared equally, what is company X’s effective borrowing rate?

	A.	3-month LIBOR−30bp
	B.	3.1%
	C.	3-month LIBOR−10bp
	D.	3.3%

Answer 1

  

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Difference if swap is agreed = (4.5% + 3 months LIBOR + 0.10) - (3.5% + 3 months LIBOR + 0.30)

= 0.80%

Benefit per party = 0.80 /2 = 0.40% OE 40 BP

Effective Rate for X = (3-month LIBOR plus 30 bp) - 40 bp

= 3-month LIBOR - 10 bp

Option C is correct.

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