Question

make to each otner H Princeton Bank and the XYZ Manufacturing Corp. enter into the following five-year 8 swap with a notional amount of $100 million and the following terms: every year for the next five years, Princeton Bank agrees to pay XYZ Manufacturing 6 % per year and receive from XYZ Manufacturing LIBOR. What type of swap is it? b. In the first year payments are to be exchanged, suppose that LIBOR is 3%.What is the amount of the payment that the two parties must make to each other? c. Suppose that the swap agreement called for XYZ Manufacturing to pay the rate on a one-year Treasury security. What type of swap would it be? a.

Answer 1

Please note : answering first question by default, as HOMEWORKLIB Q&A guidelines.

Question 8

a) Interest rate swap, since the 2 parties are swapping interest rates. One is paying a fixed rate of 6% and the other one is paying a floating interest rate, based on LIBOR (benchmark)

b) The notional amount here is $100 million.

- Amount paid by Princeton Bank (6% x $100 million) = $6 million

- Amount paid by XYZ Manufacturing Corp. - LIBOR rate - (3% x $100 million) = $3 million

c) In this case also, it would be an interest rate swap. The only difference is that the reference rate would now be based on one year treasury security.