Company X Wants to Borrow $10,000,000 Floating for 5 Years;

Multiple Choice

Company X wants to borrow $10,000,000 floating for 5 years; company Y wants to borrow $10,000,000 fixed for 5 years. Their external borrowing opportunities are shown below: A swap bank proposes the following interest only swap: X will pay the swap bank annual payments on $10,000,000 with the coupon rate of LIBOR; in exchange the swap bank will pay to company X interest payments on $10,000,000 at a fixed rate of 10.05%. Y will pay the swap bank interest payments on $10,000,000 at a fixed rate of 10.30% and the swap bank will pay Y annual payments on $10,000,000 with the coupon rate of LIBOR - 0.15%. What is the value of this swap to the swap bank?

A) The swap bank will earn 40 basis points per year on $10,000,000 = $40,000 per year.
B) The swap bank will earn 10 basis points per year on $10,000,000 = $10,000 per year.
C) The swap bank will LOSE money.
D) None of the above