hey guys…just a quick question… Should we use 180/360 to calculate the company pmt for the swap instead 180/365 ? because it clearly says Floating pmt is based on 360 days, and Company is paying LIBOR+.50 which is floating rate. 15milx5.25%x180/360 why we use 365 instead ???
it states that fixed payments are based on 365 days in a year…and in the swap that he has entered…he has to pay a fixed rate (5.25%) on EUR 15 mil. hence fixed rate payment : 0.0525 x 15,000,000 x 180/365 to the bank he has to pay 4.75 (libor) + .005 (50 basis points) on EUR 15 mil and he receives ( from the swap agreement) only 4.75 (libor when the swap was initiated) on EUR 15 mil…these are floating rate payments and will be made on a basis of 180 days hope this helps
Karan… as you mentioned…“to the bank he has to pay 4.75 (libor) + .005 (50 basis points) on EUR 15 mil and he receives ( from the swap agreement) only 4.75 (libor when the swap was initiated) on EUR 15 mil…these are floating rate payments and will be made on a basis of 180 days”… do you divide by 365 or 360 ? Answer key is dividing 365…but quetion says company use 360 for floating rate (in this case, LIBOR + .50). i m confused. Thanks again.
ok…in the ques, there are 3 different situations: 1) fixed rate payment of the swap contract (which the person has to pay to the counterparty): -on the basis on 365 days- he pays : 5.25% x 15,000,000 x 180/365 2) receiving a floating rate payment from the counter party @ libor (which in this case is 4.75% at the initiation of the contract): -on the basis on 360 days- he receives: 4.75% x 15,000,000 x 180/360 3) pay the interest on the loan @ libor + .5% ( this is a floating rate payment coz libor can change after the setlement date): -on the basis on 360 days- he pays: (4.75% + .5%) x 15,000,000 x 180/360 1) is a fixed rate payment 2) and 3) are floating rate in the answer key the fixed rate payment is divided by 365