Bonds

| December 7, 2015

An insurance company owns $50 million of floating-rate bonds yielding LIBOR plus 1 percent. These loans are financed by $50 million of fixed-rate guaranteed investment contracts (GICs) costing 10 percent. A finance company has $50 million of auto loans with a fixed rate of 14 percent. They are financed by $50 million of debt with a variable rate of LIBOR plus 4 percent. If the finance company is going to be the swap buyer and the insurance company the swap seller, what is an example of a feasible swap?

How did they come up the finance company (FC) paying Insurance company (IC) 12% and the IC paying the FC LIBOR + 2.5%?

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Category: Finance

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