Company X wants to borrow $10,000,000.00 floating for 5 years: company Y wants to borrow $10,000,000.00 fixed for 5 years. Their external borrowing opportunities are shown below:
Fixed-Rate Floating-Rate
Borrowing Cost Borrowing Cost
Company X 10% LIBOR
Company Y 12% LIBOR + 1.5%
A swap bank proposes the following interest only swap: Y will pay the swap bank annual payments on $10,000,000 with a fixed rate of 9.90% in exchange the swap bank will pay to company Y interest payments on $10,000,000 at LIBOR - 0.15%
What is the value of this swap to company Y?
a.company Y will save 15 basis points per year on $10,000,000 = $15,000 per year
b. Company Y will save 45 basis points per year on $10,000,000 = $45,000 per year
c. Company Y will save 5 basis points per year on $10,000,000=$5,000 per year
d. Company Y will only break even on the deal.
e. None of the above is correct.