Answer-first summary for fast verification
Answer: USD 78,325
The proper interest rate to use is the 6-month LIBOR rate at February 9, 2016, since it is the 6-month LIBOR that will yield the payoff on August 9, 2016. Therefore, the net settlement amount on August 9, 2016 is as follows: **Savers Bancorp receives:** USD 6,500,000 × 4.00% × 0.5 = USD 130,000 **Savers Bancorp pays:** USD 6,500,000 × (0.39% + 1.20%) × 0.5 = USD 51,675 **Net amount received:** USD 130,000 - USD 51,675 = USD 78,325 **Key Points:** - Interest rate swap payments are determined by the LIBOR rate at the beginning of each payment period - For the August 9, 2016 payment, the relevant LIBOR rate is from February 9, 2016 (0.39%) - The floating rate payment is LIBOR + 1.20% = 0.39% + 1.20% = 1.59% - All calculations use semi-annual compounding (multiplied by 0.5)
Author: LeetQuiz Editorial Team
Ultimate access to all questions.
No comments yet.
Savers Bancorp entered into a 2-year interest rate swap on August 9, 2014, in which it received a 4.00% fixed rate and paid LIBOR plus 1.20% on a notional amount of USD 6.5 million. Payments were to be made every 6 months. The table below displays the actual annual 6-month LIBOR rates over the 2-year period:
| Date | 6-month LIBOR |
|---|---|
| Aug 9, 2014 | 3.11% |
| Feb 9, 2015 | 1.76% |
| Aug 9, 2015 | 0.84% |
| Feb 9, 2016 | 0.39% |
| Aug 9, 2016 | 0.58% |
Assuming no default, how much did Savers Bancorp receive on August 9, 2016?
A
USD 72,150
B
USD 78,325
C
USD 117,325
D
USD 156,650