6. A bank will receive T+50 versus Libor or pay T+45 versus Libor. The current 10...

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6. A bank will receive T+50 versus Libor or pay T+45 versus Libor. The current 10...

6. A bank will receive T+50 versus Libor or pay T+45 versus Libor. The current 10 year treasury rate is 1.80 %. For a $100 million, 10-year swap what is the approximate profit that a bank earns by entering into both a fixed rate and an offsetting floating rate swap?

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Answer 1

Answer #1

Solution:

There are a few terms used:

1) The receiver or seller swaps the adjustable-rate payments. The payer swaps the fixed-rate payments.

2) The notional principle is the value of the bond. It must be the same size for both parties. They only exchange interest payments, not the bond itself.

3) The tenor is the length of the swap. Most tenors are from one to 15 years. The contract can be shortened at any time if interest rates go haywire.

Receives Pay Swap Gain-(Diff)

Fixed 1.8 % 1.8% Nil

Floating Libor+0.5 Libor+ 0.45 0.05

Principle : $ 100 Million *0.05

Swap Gain per year = $5 Million

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Answer 2

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