Question

Given an issued 10 year FRN for 10 million notional at 6M LIBOR + 25bps, what...

Given an issued 10 year FRN for 10 million notional at 6M LIBOR + 25bps, what type of swap can be used to convert this exposure to a fixed rate? Given a quote for this 10 year swap with a 5% fixed leg, and current LIBOR at 4%, what is the first net payment on the swap? Assume semi-annual payments at 180/360 daycount basis.

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Answer #1

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

Notional principal = 10 Million

Interest rate = 6 months LIBOR + 25 bps

Fixed interest rate = 5%

Current LIBOR = 4%

Current floating rate = 4.25%

Net payment to swap party

= 10,000,000 × (0.05 - 0.0425)× 180/360

= $ 37,500

First net payment on swap = $ 37,500

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

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