Explanation:
TIEN's payment: ($50 million)(180/360)(12%) = $3,000,000
Counterparty's payment: ($50 million)(180/360)(0.135) = $3,375,000
Therefore, TIEN would receive a net amount of $375,000.
Note: The payment calculation uses the Euribor rate from the last settlement date (13.5%), not the current rate (11.0%), because the floating payment for the current period is determined by the rate that was set on the previous settlement date. The current rate would only be used to set the floating rate for the next period.
Q.3557 Tiara Enterprises (TIEN) has just announced its plans to establish a facility in New York, USA, to meet the increased demand for its products. TIEN plans to fund the expansion with debt and in order to hedge the risk of borrowing, TIEN has entered into a plain vanilla interest rate swap with a notional principal of $50 million. TIEN would make semiannual payments at the rate of 12% with the counterparty making floating rate payments at the Euribor rate.
Assuming a 360-day year, if the Euribor was 13.5% on the last settlement date and is 11.0% on the current settlement date, what is the amount that TIEN would receive on the last settlement date?
A
$250,000
B
$625,000
C
$465,000
D
$375,000
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