Which LIBOR rate to use in swap calculation?


i came across this question in the CFAI mocks and i’m quite puzzled why the new LIBOR at 5.00% is not used in the calculation below. As LIBOR is a floating rate, shouldn’t this rate be used at the settlement date?


A company borrows $15 million from a bank for one year at LIBOR, currently at 4.75%, plus 50 basis points. At the same time, the company enters a one-year, plain vanilla interest rate swap to pay the fixed rate of 5.25% and receive LIBOR. Payments are made on the basis of 180 days in the settlement period. Floating payments are made on the basis of 360 days in a year, and fixed payments are made on the basis of 365 days in a year. LIBOR is 5.00% on the first settlement date. The company’s total interest expense for the loan and the swap for the first settlement period is closest to:

The company pays the swap dealer the fixed rate of 5.25%, pays the bank LIBOR of 4.75% (as set at the beginning of the period) plus 0.50%, and receives LIBOR from the swap dealer.

Fixed payment: ($15,000,000)(0.0525)(180/365) = $388,356

Floating payment: ($15,000,000)(0.0475 + 0.005 – 0.0475)(180/360) = $37,500

Net interest expense: $425,856

At settlement date with Libor we always use the Libor at “settlement date - 1”

oh i didn’t know that.

Thanks for the info!

Swap rates are set in advance (at the beginning of the period) and paid in arrears (at the end of the period).