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    Swap Example

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    kapoorraghav7777
    A SWAP is an agreement between two parties to exchange interest payments on a set notional principal amount at specified intervals. One party pays a fixed interest rate while the other pays a floating rate, typically tied to a benchmark interest rate like LIBOR. This allows parties to swap fixed for floating rate obligations or vice versa, transforming the interest rate characteristics of their debt or investments.

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    Swap Example

    Uploaded by

    kapoorraghav7777
    23 views9 pages
    A SWAP is an agreement between two parties to exchange interest payments on a set notional principal amount at specified intervals. One party pays a fixed interest rate while the other pays a floating rate, typically tied to a benchmark interest rate like LIBOR. This allows parties to swap fixed for floating rate obligations or vice versa, transforming the interest rate characteristics of their debt or investments.

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    A SWAP is an agreement between two parties to exchange interest payments on a set notional principal amount at specified intervals. One party pays a fixed interest rate while the other pays a floating rate, typically tied to a benchmark interest rate like LIBOR. This allows parties to swap fixed for floating rate obligations or vice versa, transforming the interest rate characteristics of their debt or investments.

    Copyright:

    © All Rights Reserved
    Download as PPTX, PDF, TXT or read online from Scribd
    Download as pptx, pdf, or txt
    23 views9 pages

    Swap Example

    Uploaded by

    kapoorraghav7777
    A SWAP is an agreement between two parties to exchange interest payments on a set notional principal amount at specified intervals. One party pays a fixed interest rate while the other pays a floating rate, typically tied to a benchmark interest rate like LIBOR. This allows parties to swap fixed for floating rate obligations or vice versa, transforming the interest rate characteristics of their debt or investments.

    Copyright:

    © All Rights Reserved
    Download as PPTX, PDF, TXT or read online from Scribd
    Download as pptx, pdf, or txt
    of 9

    SWAP

    A SWAP is an agreement to
    exchange cash flows at specified
    future times according to certain
    specified rules

    Prentice Hall 1
    Typical Uses of an
    Interest Rate Swap

     Converting a liability from


     fixed rate to floating rate
     floating rate to fixed rate

     Converting an investment from


     fixed rate to floating rate
     floating rate to fixed rate

    2
    An Example of a “Plain Vanilla”
    Interest Rate Swap

     An agreement by Microsoft to receive


    from Sunlife 6-month LIBOR & pay a
    fixed rate of 5% per annum to Sunlife
    every 6 months for 3 years on a
    notional principal of $100 million
     What will the cash flows look like?

    3
    Cash Flows to Microsoft

    ---------Millions of Dollars---------
    LIBOR FLOATING FIXED Net
    Date Rate Cash Flow Cash Flow Cash Flow
    Mar.5, 2010 4.2%
    Sept. 5, 2010 4.8% +2.10 –2.50 –0.40
    Mar.5, 2011 5.3% +2.40 –2.50 –0.10
    Sept. 5, 2011 5.5% +2.65 –2.50 +0.15
    Mar.5, 2012 5.6% +2.75 –2.50 +0.25
    Sept. 5, 2012 5.9% +2.80 –2.50 +0.30
    Mar.5, 2013 6.4% +2.95 –2.50 +0.45

    4
    Sunlife (SL) and Microsoft (MS)
    Transform a Liability
    5%

    5.2%
    SL MS
    LIBOR+0.1%
    LIBOR
    Microsoft SL
    Loan Payment LIBOR + 0.1% 5.2%
    Add: Paid under swap 5.0% LIBOR
    Less: Received under swap - LIBOR - 5%
    Net Payment 5.1% LIBOR + 0.2%
    5
    Financial Institution is Involved
    4.985% 5.015%

    5.2%
    SL F.I. MS
    LIBOR+0.1%
    LIBOR LIBOR

    Microsoft SL
    Loan Payment LIBOR + 0.1% 5.2%
    Add: Paid under swap 5.015% LIBOR
    Less: Received under swap - LIBOR - 4.985%
    Net Payment 5.115% LIBOR + 0.215%

    6
    Intel and Microsoft (MS)
    Transform an Asset
    5%
    4.7%
    SL MS
    LIBOR-0.2%

    LIBOR
    Microsoft SL
    Investment Income 4.7% LIBOR – 0.2%
    Less: Paid under swap - 5.0% - LIBOR
    Add: Received under swap LIBOR 5%
    Net Income LIBOR – 0.3% 4.8%

    7
    Financial Institution is Involved
    4.985% 5.015%

    4.7
    SL F.I. MS %
    LIBOR-0.2%
    LIBOR LIBOR

    Microsoft SL
    Investment Income 4.7% LIBOR – 0.2%
    Less: Paid under swap - 5.015% - LIBOR
    Add: Received under swap LIBOR 4.985%
    Net Income LIBOR – 0.315% 4.785%

    8
    Quotes By a Swap Market Maker
    Maturity Bid (%) Offer (%) Swap Rate (%)
    2 years 6.03 6.06 6.045
    3 years 6.21 6.24 6.225
    4 years 6.35 6.39 6.370
    5 years 6.47 6.51 6.490
    7 years 6.65 6.68 6.665
    10 years 6.83 6.87 6.850

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