文档介绍：INTERNATIONAL
FINANCIAL
MANAGEMENT
EUN / RESNICK
Second Edition
10
Chapter Ten
Currency & Interest Rate Swapsixed-rate Eurodollar bonds at 10 percent.
It would make more sense to for the bank to issue floating-rate notes at LIBOR to finance floating-rate Eurodollar loans.
6
An Example of an Interest Rate Swap
Firm B is a BBB-rated . company. It needs $10,000,000 to finance an investment with a five-year economic life.
Firm B is considering issuing 5-year fixed-rate Eurodollar bonds at percent.
Alternatively, firm B can raise the money by issuing 5-year FRNs at LIBOR + ½ percent.
Firm B would prefer to borrow at a fixed rate.
7
An Example of an Interest Rate Swap
The borrowing opportunities of the two firms are shown in the following table:
8
10 3/8%
LIBOR – 1/8%
An Example of an Interest Rate Swap
Bank
A
Swap
Bank
The swap bank makes this offer to Bank A: You pay LIBOR – 1/8 % per year on $10 million for 5 years and we will pay you 10 3/8% on $10 million for 5 years
9
10 3/8%
LIBOR – 1/8%
An Example of an Interest Rate Swap
Bank
A
Swap
Bank
Here’s what’s in it for Bank A: They can borrow externally at 10% fixed and have a net borrowing position of
-10 3/8 + 10 + (LIBOR – 1/8) =
LIBOR – ½ % which is ½ % better than they can borrow floating without a swap.
10%
½ % of $10,000,000 = $50,000. That’s quite a cost savings per year for 5 years.
10
LIBOR – ¼%
10 ½%
An Example of an Interest Rate Swap
Swap
Bank
Company
B
The swap bank makes this offer to company B: You pay us 10 ½ % per year on $10 million for 5 years and we will pay you LIBOR – ¼ % per year on $10 million for 5 years.
11
LIBOR – ¼%
10 ½%
An Example of an Interest Rate Swap
Swap
Bank
Company
B
They can borrow externally at LIBOR + ½ % and have a net borrowing position of
10½ + (LIBOR + ½ ) - (LIBOR - ¼ ) = % which is ½ % better than they can borrow floating without a swap.
LIBOR + ½%
Here’s what’s in it for B:
½ % of $10,000,000 =