Question

Capital One Bank enters into a $10,000,000 quarterly‐pay plain‐vanilla interest rate swap as the fixed‐rate payer at a swap rate of 6% based on a 360‐day year. The floating‐rate payer, First Bank, agrees to make payments at 90‐day LIBOR plus a 0.6% margin. The 90‐day LIBOR rate currently stands at 4%. LIBOR‐90 rates are as follows:

 90 days from today = 4.5%

180 days from today = 5.1%

270 days from today = 5.6%

360 days from today = 6.0%

After 180 days, First Bank will most likely:

Group of answer choices

Pay $7,500.

Receive $37,500.

Receive $22,500.

Answer 1

A Interest rate Swap is a contract between two companies/parties that enables a company to take floating rate and to pay a fixed interest rate.

In the above sum swap contract is as follows capital one bank issues fixed rate @ 6% which is a liablity and purchasing an asset of floating rate @90 day- Libor+0.6% similarly for the first bank vice versa At the inception of the swap the LIBOR should be fixed aganist such a fixed rate that the value of the both the interest rates are equal in other words the swap value is zero.

but as the swap progress the cash flows is as follows

Capital one bank: Net pay out(cash Outflow)

After 90 days:

$10000000*6%*90/360=$150000

After 180 days:

$10000000*6%*180360=$300000

First Bank : Net pay out(cash Outflow)

After 90 days:

$10000000*5.1%(LIBOR 90 days+0.6%)*90/360=$127500

After 180 days:

$10000000*5.7%(LIBOR 180 days+0.6%)*180360=$285000

There fore After 180 days, First Bank will most likely receive $37500