Lee Ltd and Ng Corporation negotiate a $15 million, 5-year interest-rate swap in in which Lee will pay 4.25% fixed rate to Ng and Ng will pay Libor to Lee (there is no swap dealer involved). The firms will net payments half-yearly. Lee generally pays Libor plus 20 basis points for borrowing and Ng borrows at 4.10%.

Determine the “all-in-cost” for Lee and Ng. It may be useful to create a diagram showing the payment responsibilities of each firm.

Suppose after two years the market is offering a swap rate of 3.25% against Libor. A swap dealer offers to take the swap off Lee’s hands. How much will Lee have to pay the dealer?

Answer rating: 100% (QA)

1 Lees Allin Cost is 445 Ngs AllIn Cost is LIBOR 15 bps 2 Lee has to pay 20000 to the swap dealer Ex... View the full answer