3) You have issued a term loan to a borrower at 4% for 4 years on...

3) You have issued a term loan to a borrower at 4% for 4 years on $25m. They are ecstatic because they (and you) believe interest rates will go up in that 4-year period, but you needed to do the loan because you want the customer’s business.

To save your Spread, you decide to buy a $25m notional principal interest rate swap for 4% Fixed to receive SOFR+2%. Assume SOFR for the next 4 years are expected to be 4.25%, 4.75%, 5.5% and 6%, respectively.

Generate a 4-year Cash Flow table detailing what the customer pays, what you will pay in the swap, what you will receive in the swap, and show why you have converted their fixed payments into floating receipts.

Expert Solution

1. Customer pays as $4 million as interest.

2. I will pay in the swap $4 million as interest

3. I will receive in the swap $7.125 million as interest

4. I have converted their fixed payments into floating receipts to take benefits from rising interest rate in upcoming years. I am receiving $4 million interest from Customer against actual cash loan however Paying $4 million and receiving $7.125 million interest against notional loan.

jeff jeffy answered 1 year ago

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