Question 21 Boeing has entered into a 10 year interest rate swap with Bank Ameri
ID: 2721469 • Letter: Q
Question
Question 21
Boeing has entered into a 10 year interest rate swap with Bank America with a notional principal of $500 million. Boeing has agreed to pay LIBOR – the floating rate side of the swap. Bank America has agreed to pay a fixed rate of 7%. Assume that next year, LIBOR is 7.5%. The net payment at that date will be:
Bank America pays Boeing $2,500,000
Boeing pays Bank America $502,500,000
Boeing pays Bank America $2,500,000
Boeing pays Bank America $3,750,000
Bank America pays Boeing $25,000,000
Bank America pays Boeing $2,500,000
Boeing pays Bank America $502,500,000
Boeing pays Bank America $2,500,000
Boeing pays Bank America $3,750,000
Bank America pays Boeing $25,000,000
Explanation / Answer
Correct Answer is Boeing pays Bank America $2,500,000
Solution:
Under Interest Rate swap agreement, the settlement will be done only by paying differncial interest.
In this question, Boeing has agreed to pay LIBOR (7.5%) the floating rate side of the swap. Bank America has agreed to pay a fixed rate of 7%.
It means Boeing will pay 7.5% and receive only 7%. The difference interest payment @ 0.5% is to be paid by boeing to Bank America.
Net interest amount paid by Boeing = $500,000,000 x 0.5% = $2,500,000
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