If the bank could borrow at a fixed rate of 10% for 5 years, what is the notional principal of the swap if the interest is a fixed payment of $5 million per year?
A)$90 million
B)$50 million
C)$75 million
D)$80 million

Question

Quizplus · Accepted Answer

We can begin the calculation by using the formula for calculating the fixed rate of a swap:
Fixed rate = (Interest paid on swap - Interest received on swap) / Notional principal
From the given information, the fixed rate is 10%, and the interest paid on the swap is $5 million per year. Let x be the notional principal. Then, the interest received on the swap is x * 10% = 0.10x. 
Plugging these values into the formula, we get:
10% = ($5 million - 0.10x)/x
Simplifying this equation, we get:
x = $75 million
Therefore, the notional principal of the swap is $75 million. Answer choice (C) is the correct answer.

If the Bank Could Borrow at a Fixed Rate of 10