411 - FINAL

Question 1

Interest rate swap

Answer 1

most common OTC swap is int. rate swap - when a comp. agrees to pay CFs equal to interest at a predetermined FIXED rate on a notional principal for a number of years
–in RETURN they rec. interest at a FLOATING rate on same notional principal for same period of time

Question 2

LIBOR

Answer 2

floating rate in most int. rate swaps - London Interbank Offered rate
–rate of int. an AA rated bank can borrow money from other banks

Prime = often the reference floating rate of int. in domestic fin. mkt. — LIBOR is ref. rate of int. for loans in international fin mkt.

ex. 5 year bond with int. rate of 6 mo. LIBOR + .5% per annum. — 6 mo. LIBOR bc rec. pmts. in 6 mo. periods

Question 3

ex. hypothetical 3 year swap

Answer 3

apple agrees to pay Citi int. rate of 3% on principal of $100M - citi agrees to pay Aple the 6 mo. LIBOR on same principal

• –here Apple is fixed rate payer and Citi is floating payer
• -pmts. every 6 mo. and 3% int