Boeing has entered into a 10 year interest rate swap with Bank America with a no
ID: 2720620 • Letter: B
Question
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 6.5%. The net payment at that date will be:?
A. Boeing pays Bank America $2,500,000
B. Bank America pays Boeing $2,500,000
C. Bank America pays Boeing $502,500,000
D. Bank America pays Boeing $3,750,000
E. Boeing pays Bank America $3,750,000
Explanation / Answer
Solution:
Correct Answer is B. Bank America pays Boeing $2,500,000
Under the give interest rate swap agreement Boeing has agreed to pay LIBOR against Fixed Rate of Interest.
Boeing will received Fixed Rate from Bank America and pay LIBOR to Bank America.
Under this Agreement Boeing will receive (7% - 6.5% = 0.5%)
Hence Bank America pays Boeing = $500,000,000 x 0.5% = $2,500,000