### CFA Practice Question

A firm has a Euro 100 million loan that requires it to pay LIBOR + 75 basis points. LIBOR is currently 4.3%. The firm is apprehensive of rising interest rates, and therefore enters into a 3 year swap agreement that requires it to pay fixed 5.2% and receive LIBOR every 90 days with the notional amount Euro 100 million. Fixed payments are calculated assuming 360 days in a year, whereas floating payments (both loan and swap) are calculated using 365 days in a year. LIBOR on the first settlement date is 3.95%. The net interest payment (both swap and loan) on the first settlement date is:
A. 1,558,904
B. 2,545,205
C. 1,484,932
Explanation: Fixed payments is Euro 100 million * 5.2% * (90/360) = Euro 1,300,000
Floating payment is Euro 100 million * (4.3% + 0.75% - 4.3%) * (90/365) = Euro 184,932
Total payments = Fixed + Floating = 1,484,932
It is important to remember that the payments on the first settlement date are made on the LIBOR today, rather than LIBOR that prevails at that time.

User Comment
moll It actually does not matter which LIBOR to use in this question, as the two rates are canceled out. However if we were required to calculate the floating payments alone then it would matter.
jpducros Under the loan, the firm has to pay 4,3+0,75 but receives 4,3 from the floating leg of the swap. Here both are done in the same calculation.