Firm IBM initiates a one-year swap in which IBM swaps a sterling loan with a dollar loan, paying coupon on the sterling loan and receiving coupon on the dollar loan at maturity. The principal amounts in the two currencies are $15 million and 10 million pounds. The current exchange rate is $1.5 per pound. The one-year simple interest rates are 2% for US and 4% for UK. The initial value of the swap is zero to IBM. 

If the coupon rate is 10% per year for the dollar loan, what is the coupon rate on the sterling loan?

Answer rating: 100% (QA)

First lets convert the principal amount of the dollar loan to pounds 15 million x 15 per pound 10 mi... View the full answer