Amazon corporation and Microsoft corporation agree to enter an interest swap agreement with a nominal value of $1,000,000. The two companies enter into two-year interest rate swap contract with the specified nominal value of $1,000,000. Amazon corporation offers Microsoft corporation a fixed rate of 5% in exchange for receiving a floating rate of the LIBOR rate plus 1%. The current LIBOR rate at the beginning of the interest rate swap agreement is 4%. Critically evaluate interest rate swap agreements focusing on their significance and advantages in financial management.
Amazon corporation and Microsoft corporation agree to enter an interest swap agreement with a nominal value of $1,000,000. The two companies enter into two-year interest rate swap contract with the specified nominal value of $1,000,000. Amazon corporation offers Microsoft corporation a fixed rate of 5% in exchange for receiving a floating rate of the LIBOR rate plus 1%. The current LIBOR rate at the beginning of the interest rate swap agreement is 4%. Critically evaluate interest rate swap agreements focusing on their significance and advantages in
A swap is a derivative instrument where a fixed cash flow is an exchange for a variable cash flow. The payments are based on a notional principal.
Amazon corporation will pay a fixed rate of 5% to Microsoft corporation, therefore, the amount that would be paid by Amazon to Microsoft will be as follows:
The amount due from Amazon to Microsoft = Nominal value of contract * Fixed interest rate
=$1,000,000 * 5%
= $50,000
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