Compute the payments due in the second year on a three-year amortizing swap from company B to company A.Company A and company B both want to borrow £1,000,000 for three years.A wants to borrow floating and B wants to borrow fixed.A and B agree to split the QSD.

$$\begin{array} { c c c }
& \text { Fixed-Rate Borrowirg } & \text {Floatirig-Rate Bort owirig } \
& \text { Cost } & \text { Cost } \
\text { Compary A } &10 \% & LIBOR\
\text { Compary B }& 12 \% & LIBOR+1.5 \%
\end{array}$$
A)B pays £402,114.80 to A
B)B pays £100,000 to A
C)B pays £69,788.52 to A
D)none of the options

Question

Compute the payments due in the second year on a three-year amortizing swap from company B to company A.Company A and company B both want to borrow £1,000,000 for three years.A wants to borrow floating and B wants to borrow fixed.A and B agree to split the QSD.

$$\begin{array} { c c c } 
& \text {  Fixed-Rate Borrowirg } & \text {Floatirig-Rate Bort owirig  } \
& \text { Cost } & \text { Cost } \
\text { Compary A }  &10 \% & LIBOR\
\text { Compary B }& 12 \% & LIBOR+1.5 \%
\end{array}$$
A)B pays £402,114.80 to A
B)B pays £100,000 to A
C)B pays £69,788.52 to A
D)none of the options

Quizplus · Accepted Answer

Since the swap is three years long, the payments are split into three parts. In the first year, Company B pays A the fixed rate of 12% on the £1,000,000 loan, which is £120,000. Company A pays B the floating rate, which is LIBOR + 1.5%.

In the second year, the payments are based on the remaining principal balance of the loan, which is £1,000,000 - (£120,000 paid by B in Year 1). So the payment due from B to A in Year 2 is calculated as follows:
Payment = Fixed Rate * (Remaining Principal Balance) - Floating Rate * (Remaining Principal Balance)
Payment = 12% * (£1,000,000 - £120,000) - (LIBOR + 1.5%) * (£1,000,000 - £120,000)

Using a LIBOR rate of 2%, we get:
Payment = 12% * £880,000 - (2% + 1.5%) * £880,000
Payment = £105,600 - £24,480
Payment = £81,120

Therefore, Company B pays £81,120 to Company A in the second year. The correct answer is C.

Compute the Payments Due in the Second Year on a Three-Year