Question

Lanvin and Bottega companies are offered a hve-year term borrowing at the following rates. Fixed-rate Floating-rate Lanvin Co. 10.50% LIBOR + 0.50% Bottega Co. 11.00% LIBOR + 2.00% If they enter into a plain vanilla interest rate swap with each other where the apparent benefts are shared equally. If the LIBOR is 8.27%, the notional principal is $20 million; payments are based on the assumption of 180 days in the payment period and 360 days in a year. Find the upcoming net payment in the plain vanilla interest rate swap between Lanvin Co, and Bottega Co.

Answer 1

The upcoming net payment in the plain vanilla interest rate swap between Lanvin Co. and Bottega Co. is $617,166.67 for Lanvin and $586,500 for Bottega.

For Lanvin Co:

Fixed-rate = 10.50%

Floating-rate = LIBOR + 0.50% = 8.27% + 0.50% = 8.77%

Notional Principal = $20 million

Payment Period = 180 days

Days in a Year = 360 days

Fixed Payment = (Fixed-rate / 360) * Payment Period * Notional Principal

= (10.50% / 360) * 180 * $20 million

= $1,050,000

Floating Payment = (Floating-rate / 360) * Payment Period * Notional Principal

= (8.77% / 360) * 180 * $20 million

= $432,833.33

For Bottega Co:

Fixed-rate = 11.00%

Floating-rate = LIBOR + 2.00% = 8.27% + 2.00% = 10.27%

Notional Principal = $20 million

Payment Period = 180 days

Days in a Year = 360 days

Fixed Payment = (Fixed-rate / 360) * Payment Period * Notional Principal

= (11.00% / 360) * 180 * $20 million

= $1,100,000

Floating Payment = (Floating-rate / 360) * Payment Period * Notional Principal

= (10.27% / 360) * 180 * $20 million

= $513,500

For Lanvin Co., Net Payment:

= Fixed Payment - Floating Payment

= $1,050,000 - $432,833.33

= $617,166.67

For Bottega Co., Net Payment:

= Fixed Payment - Floating Payment

= $1,100,000 - $513,500

= $586,500