Answer for Suppose that on Dec. 31, 2006, Company A and Company B Enter into a Five-Year in $1 Only (Instant Download)
6. Suppose that on Dec. 31, 2006, Company A and Company B enter into a five-year swap with the following terms:
- Company A pays Company B an amount equal to 6% per annum on a notional principal of $20 million
- Company B pays Company A an amount equal to one-year LIBOR + 1% per annum on a notional principal of $20 million.
Assume that LIBOR is 5.5%.
a. Show the cash flows each party pays the other. What is the net difference?
b. Assume after 2 years, LIBOR increases to 7%, what would happen?
c. Assume after 3 years LIBOR decreases to 4.5%, what would happen?
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