MAT 483 exercise for June 27, 2022

MAT 483 exercise for June 27, 2022, video solution: https://smartURL.it/KO-FM-Exercise559

EIB has arranged to borrow $100 million at a floating rate of SOFR plus 100 basis points, but EIB would prefer to borrow at a fixed rate of 6.6%. Carkosheek Enterprises has arranged to borrow $100 million at a fixed rate of 6% but would prefer to borrow at a floating rate. Both EIB and Carkosheek Enterprises are aware of a financial institution that will arrange a swap at a cost of 10 basis points (5 basis points to each side) on a pair of offsetting transactions. Find the floating rate paid by Carkosheek Enterprises. Choose the answer closest to the right one.

A. SOFR + 0.10% B. SOFR + 0.20% C. SOFR + 0.30%
D. SOFR + 0.40% E. SOFR + 0.50%

Solution.
EIB is willing to pay 6.6% fixed and wants to receive SOFR plus 100 bps. The financial institution will collect 5 bps from 6.6% on the EIB side, and then another 5 bps on the Carkosheek Enterprises side, and have 6.5% left to pay to Carkosheek Enterprises. It will want to receive SOFR plus 100 bps from Carkosheek Enterprises in order to pay to EIB. But Carkosheek Enterprises is paying 6% on its loan, so it only wants to receive 6% fixed, and instead of receiving 6.5% fixed and paying SOFR plus 100 bps, it will ask to receive 6% fixed and pay SOFR plus 50 bps, resulting in the same net payment. Thus the answer is SOFR + 0.50%.
Answer E.

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