SWAP: Settlement rate company, borrowed, agreement, LIBOR, terms

irlfaan7

I am confused as to what LIBOR rate to be used to settle a swap agreement
Company pays fixed 5.25% using 180/365
Recvs float @ 180/360 terms

LIBOR at agreement 4.75
LIBOR at settlement 5.00

how does the company settle the transaction if the company has borrowed $15MM from a bank @5.25 coupon?

Maddin

The reason for the difference of rate used is quite easy to figure out.

For FRA: you settle the FRA at the BEGINNING of the period and since

- interest is paid AT THE END of the period
- LIBOR is "forward-looking" rate (i.e., rate to be used for the coming period).

You need to use the current rate to know what (interest difference) you need pay AT THE END of the period then discount it back (to the beginning of the period) to calculate the pay out.

While SWAP: just regular swapping of interest to be paid at the end of the (last or each) period (which by convention is the beginning of the next period).
So to you calculate what interest you own, you need the rate at the beginning of last period since you are now at the end of last period. No discounting is required since you are paying it now.


Hope it makes sense

leadcfa

elcfa and TILT...thanks a lot...
I forgot to mention that this is the first settlement date -- agreement date would be the last settlement date.

So for SWAP, use the last settlement date LIBOR rate for float whereas for FRA, use the LIBOR at settlement for settling the transaction.

Are there such differences of applications required for any other instruments that are tested in L1?

Appreciate your help!

Finalnub

Slow down mates.

First there are different day convention of the terms, so you have to calculate separately 360 days vs. 365 days.
Secondly, LIBOR term to be used in the one AT THE LAST settlement date, which you are not giving us. NB: last settlement date does not mean agreement date, if the swap has been settled a couple of times.

So if I assume that LIBOR at settlement 5.00 is the LIBOR rate to be applied (i.e., floating LIBOR at previous settlement date, not current floating LIBOR) then

Pay fixed 15MM* (180/365)*5,25%
Pay floating 15MM* (180/360)*5%

Netting out
Pay fixed pays to pay floating 15MM* (180/365)*5,25% -15MM* (180/360)*5%. You figure out the rest :-).