Prepare a spreadsheet that shows the payments and receipts of BOTH parties, for the swap and for the position on their books, and for BOTH interest rate scenarios.
Two parties enter into a swap with the following parameters:
Term/Tenor 3 years
Fixed Rate: 3.00%
Floating rate: 3-month LIBOR
Payment Frequency: 2 (semi-annually)
Notional Amount: $50,000,000
LIBOR at initiation: 2.00%
LIBOR in future:
1. assume LIBOR increases by 0.20% (20 bp) every 6 months
2. assume LIBOR decreases by 0.20% (20 bp) every 6 months
Party A is the fixed rate payer. A’s books show it has borrowed using a floating rate note in the amount of $50,000,000 with interest at 3-month LIBOR. The proceeds are invested in a fixed rate asset that pays a fixed rate of 3.50%
Party B is the floating rate payer. B’s books show it has a floating rate investment in the amount of $50,000,000 that pays 3-month LIBOR but is funded by fixed rate debt at 2.50%.