MC bank: Assets Liabilities Loans (LIBOR rate) 50 million 3-year fixed rate note

Question

MC bank:

Assets

Liabilities

Loans (LIBOR rate) 50 million

3-year fixed rate note (5% rate) 50 million

SA bank:

Assets

Liabilities

Fixed rate mortgage (6% rate) 50 million

1-year CD 50 million

Suppose these two banks enter into a fixed for floating interest rate swap for 3 years with the assistance of a swap dealer:

MC makes (LIBOR - 1%) periodic payment using 50 million as the notional value to SA

SA makes 4.5% payment using 50 million as the notional value to MC

Suppose both sides agree to exchange cash flow once a year and using year end LIBOR rate and CD rate to settle.

At the end of year 1, LIBOR = 6%, and CD rate = 4%

Compute, the net cash flow to MC bank at the end of year 1 is (i.e. sum over the inflow and outflow on and off balance sheet) _____________________(units in millions, i.e. , if your answer is 120,000, write is as 0.12)

Assets

Liabilities

Loans (LIBOR rate) 50 million

3-year fixed rate note (5% rate) 50 million

Explanation / Answer

MC Bank Cash Flow Statement :-

Assets 50 Million @ 6% Libor Rate so Inflow (50*6%) = 3 Million

Libility 50 million @ 5 % fixed Rate So Out flow(50*5%) = (2.5) Million

as per swap agreement

MC will Pay to SC @ (6) *50 = 3 Million

MC will Recived from SC 50*4%=2 Million

Due to Swap Agreement Net out flow for MC = (1) Million

Answer Net Out flow for MC is (3 - 2.5 - 1) = (.5) Million

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