Suppose a bank can borrow five- year fixed- rate funds at 9% p.a. and floating rate at BBR (bank bill rate). Assume a company must pay 11% fixed and (BBR + 2%) for floating. Then there is no scope for a profitable swap because the bank is better off in both markets going it alone.

Question

Quizplus · Accepted Answer

The bank and the company can engage in a swap where the bank pays the company a fixed rate lower than 11% and receives BBR, while the company pays the bank a floating rate lower than BBR + 2% and receives a fixed rate. This can create a win-win situation where both parties benefit from better rates than they could achieve independently.

Suppose a Bank Can Borrow Five- Year Fixed- Rate Funds