Issued bonds that pay libor to investors

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Reference no: EM131327291

Draw a picture illustrating the following fact pattern involving an interest rate swap:

Company A has issued bonds that pay LIBOR (a floating rate) to investors (in exchange for cash). Company B has issued bonds with a fixed 5% rate to investors (in exchange for cash), with interest payable semiannually. Company A and Company B enter into an interest rate swap. In this swap, Company A will pay a fixed 5% rate to Bank (a financial intermediary); in turn. Bank passes this payment on to Company B. Company B will pay LIBOR to Bank, which in turn passes this payment to Company A. (Through this derivative transaction, Company A has essentially converted its payment obligation from a floating to a fixed rate; Company B has converted its obligation from fixed to floating).

(Hint: to begin this picture, draw four boxes in a row horizontally, to depict, respectively, Investors, Company A, Company B, Investors. There should be lines between each company and its investors depicting the consideration they exchange. Above this horizontal row, draw one box for Bank.)

Reference no: EM131327291

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