ISWAP is a nonfinancial firm with a weak financial condition. Local banking inst

Question

ISWAP is a nonfinancial firm with a weak financial condition.  Local banking institutions are willing to offer ISWAP only variable-rate loans.  A fixed-rate loan would be more desirable, in light of a long-term investment in a new product that is contemplating.  USWAP is a large, strongly capitalized bank in a nearby city that would benefit from variable-rate funding for its short-term asset portfolio.  The opportunities to borrow funds for the two parties is as follows:

                               Variable Rate         Fixed Rate

ISWAP (firm)         LIBOR + 1%              14%

USWAP (bank)       LIBOR + 0.5%          12%

From this information, it is clear that ISWAP pays a 2 percent premium for fixed-rate funds but only a 0.5 percent premium for variable-rate funds.

Assume that an intermediary is contacted to handle the details of the swap.  ISWAP takes out a variable-rate loan at LIBOR + 1 percent but swaps this loan

ISWAP is a nonfinancial firm with a weak financial condition. Local banking institutions are willing to offer ISWAP only variable-rate loans. A fixed-rate loan would be more desirable, in light of a long-term investment in a new product that is contemplating. USWAP is a large, strongly capitalized bank in a nearby city that would benefit from variable-rate funding for its short-term asset portfolio. The opportunities to borrow funds for the two parties is as follows: From this information, it is clear that ISWAP pays a 2 percent premium for fixed-rate funds but only a 0.5 percent premium for variable-rate funds. Assume that an intermediary is contacted to handle the details of the swap. ISWAP takes out a variable-rate loan at LIBOR + 1 percent but swaps this loan's payments with USWAP, who issues seven-year notes at 12 percent. ISWAP pays USWAPs interest bill plus 0.1 percent fee to the intermediating bank. USWAP pays the LIBOR component of ISWAP's variable-rate loan and leaves the fixed 1 percent to be paid by ISWAP. Make a table showing ISWAP's costs, ISWAP's savings from the swap, show the intermediary's fees and the receipts and payments. What is the feasibility of the swap? Make a table showing USWAP's costs, USWAP's savings from the swap, show the intermediary's fees and the receipts and payments. What is the feasibility of the swap?

Explanation / Answer

2-ANS- During the 2011 legislative session, Engrossed Second Substitute House Bill 1795

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