Boeing has entered into a 10 year interest rate swap with Bank America with a no
ID: 2720634 • 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 7.5%. The net payment at that date will be:
a. Boeing pays Bank America $502,500,000
b. Boeing pays Bank America $2,500,000
c. Bank America pays Boeing $25,000,000
d. Boeing pays Bank America $3,750,000
e. Bank America pays Boeing $2,500,000
Explanation / Answer
Boeing shall pay interest = LIBOR = 7.5%
Bank America shall pay 7% fixed
Net result : Boeing will pay 7.5% - 7% = .5%
Amount to be paid = $500000000 * .50% = $2500000
Boeing pays Bank America $2,500,000
Option b. is correct