Question

An interest rate swap has the following specifications:

• Notional principal = $100m
• Pay fixed rate (annual basis) = 7%
• Received rate (annual basis) = LIBOR plus 1%
• Interest rate calculations are in quarterly basis.

Counterparty X entered a pay fixed rate swap on Jan 1, 2019 with Counterparty Y. On Dec 31, 2019, the LIBOR rate is 5.5%. What should be the net cashflow?

Answer 1

The net cash outflow for Counterparty X will be $500,000. Details follows -

Here we will take the difference between fixed rate & LIBOR rate, i.e., 7% less 5.5%+1% which is 6.5% hence the difference is .5%.

Since not much of the information is provided for quarterly LIBOR, we are assuming here the LIBOR is same thru period.

Counterparty X will pay to Y additional of $500,000 total over 1 year period thru quarterly interest payments i.e. $125,000 per quarter.