Question

A US company has entered into an interest rate swap with a dealer in which the notional principal is $50 million. The company will pay a floating rate of LIBOR and receive a fixed rate of 5.75%. Interest is paid semi-annually, and the current LIBOR=5.15%. What is the total amount that the asset manager will pay to (or receive from) the dealer EVERY half of the year? Assume that every year we have 360 days, and each semi-annual payment is made on 180 days from the last payment. [Note: You should use a positive number to represents the amount the asset manager pay to the dealer. You should use a negative number represents the amount that asset manager receive from the dealer]

Answer 1

Total amount paid by asset manager to dealer = notional amount * current LIBOR * (180 / 360)

Total amount paid by asset manager to dealer = $50 million * 5.15% * (180 / 360) = $1,287,500

Net amount paid by asset manager to dealer = notional amount * (fixed rate - current LIBOR) * (180 / 360)

Net amount paid by asset manager to dealer = $50 million * (5.75% - 5.15%) * (180 / 360) = $150,000