Final answer:
The value of the swap to Y is the difference between the interest payments saved by swapping their 12% or LIBOR+1.5% borrowing rate for the fixed 10.30% rate, which could be $170,000 annually if borrowing at 12%. The swap bank's value is based on its cost of funds relative to the LIBOR - 0.15% rate it pays.
Step-by-step explanation:
When evaluating the value of a swap from Y's perspective, it's important to consider both the fixed and floating interest payment streams the company would receive and make. Y is obliged to make payments on $10,000,000 at a fixed rate of 10.30%, which translates to $1,030,000 annually. In contrast, it receives LIBOR - 0.15% from the swap bank. If Y can borrow at either 12% or LIBOR+1.5%, we need to compare these rates with the fixed rate of the swap to calculate the benefit.
If Y borrows at 12%, the swap saves them the additional interest they would have to pay over the 10.30% fixed rate of the swap. Since 12% of $10,000,000 is $1,200,000, the savings from the swap on the interest payment would be $1,200,000 - $1,030,000, which equals $170,000 annually. If Y chooses to borrow at LIBOR+1.5% instead, the benefit will depend on the current LIBOR rate. Assuming LIBOR is less than 8.8% (10.3% - 1.5%), Y would still save on the swap as LIBOR+1.5% would be less than the 10.30% fix rate they're paying.
The value of the swap to the bank will depend on the bank's cost of funds and its ability to benefit from the spread between the interest rate it pays to Y (LIBOR - 0.15%) and its own borrowing costs. If the swap bank has a lower borrowing cost than LIBOR, it profits from the difference.