DERIVATIVE
SECURITIES 10-13
LDM Corporation agrees to pay XYZ Corporation fixed rate
payments of 8.0%. XYZ agrees to pay LDM a floating rate of LIBOR
+ 0.5%. You can see the cash flows in Figure 10.4.
Figure 10.4: Cash Flows for Interest Rate Swap
This table helps organize the cash flows:
Cash Flow
XYZ
LDM
Payment to investors
- 8.00%
- LIBOR + 2.00%
Pays in swap
- LIBOR + 0.50%
- 8.00%
Receives in swap
+8.00%
+LIBOR + 0.50%
Net payment
- LIBOR + 0.50%
- 9.50%
Benefits of
the swap
Let's see how each company benefits from the swap.
XYZ
LDM
Rate available in market
LIBOR + 1.0% Floating
10.50% Fixed
Net payment in swap
LIBOR + 0.5%
9.50%
a
Savings
0.5% Floating
1.0% Fixed
Both companies now have the type of financing they need -- and at a
lower cost than if the swap agreement had not been arranged!
