Question

Suppose the quote for a five-year swap with semiannual payments is 8.50−8.60 percent. This means (Match the following statements to being correct or incorrect) the swap bank will pay semiannual fixed-rate dollar payments of 8.60 percent against receiving six-month dollar LIBOR. the swap bank will receive semiannual fixed-rate dollar payments of 8.60 percent against paying six-month dollar LIBOR. the swap bank will receive semiannual fixed-rate dollar payments of 8.50 percent against paying six-month dollar LIBOR. the swap bank will pay semiannual fixed-rate dollar payments of 8.50 percent against receiving six-month dollar LIBOR

Answer 1

In a swap quote of 8.50−8.60 percent, the swap bank will pay 8.50 percent and receive 8.60 percent. The bank pays the lower rate and receives the higher rate in the fixed-for-floating swap arrangement.

Step-by-step explanation:

When interpreting a quote for a five-year swap with semiannual payments of 8.50−8.60 percent, it is necessary to understand that in a typical interest rate swap, one party will pay a fixed rate (the swap rate) and receive a floating rate, while the other party will do the opposite.

Given the quote 8.50−8.60 percent, the correct interpretations are:

• The swap bank will receive semiannual fixed-rate dollar payments of 8.60 percent against paying six-month dollar LIBOR is correct.
• The swap bank will pay semiannual fixed-rate dollar payments of 8.60 percent against receiving six-month dollar LIBOR is incorrect.
• The swap bank will receive semiannual fixed-rate dollar payments of 8.50 percent against paying six-month dollar LIBOR is incorrect.
• The swap bank will pay semiannual fixed-rate dollar payments of 8.50 percent against receiving six-month dollar LIBOR is correct.

In the context of this swap quote, the lower rate (8.50 percent) is usually the rate that the swap bank would pay, and the higher rate (8.60 percent) is the rate it would receive.