Question

- Who benefits in an interest rate swap? Explain

-Explain how a letter of credit issued with an example for all 3 parties involved. Be detailed in the process/chain linking all parties

Answer 1

Part a

Interest rate swap is an agreement between two parties where the parties agree to exchange their interest rates on notional principal amount. The rate of interest paid by each party is such, which is beneficial to both of them.

Thus, in a Interest Rate swap, both the parties are at benefit of paying low rates of interest.

Part b

Letter of Credit is basically a gurantee which is issued by one bank to other bank stating that payment which are required to be made by the buyer will be repaid on time. If, in any case, buyer fails to pay the ful amount, then the issuing bank is liable to fulfil its obligation.

There are three parties to a Letter of Credit, namely, "Issuing Bank- i.e the bank issuing letter of credit", "Receiving bank- Bank to whom gurantee is issued" and "Buyer- The person in whose favor gurantee is issued"

For example:-

Suppose, Mr John made a purchase from Mr. Shawn amounting to $100,000. Mr John has his account in Bank A and Mr Shawn has his account in Bank B. In this case, Bank A will issue letter of credit to Bank B in favor of Mr John. If Mr John fails to make payment on specified date, then Bank A will be liable to make payment on behalf of Mr John.

Please upvote the answer if it was of help to you.
In case of any doubt just comment below, I would love to help.