cfai mock #94 morning one more question why, question, morning, because

cross-ied

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 ???

prashantsahni

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

spartan1

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.

YouCanDoIt

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