Determine the basis of the ultimate cost of the payment, Financial Accounting

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Given information:

Offered a $20 million commercial loan priced using a 3month LIBOR index+100bp.

After some preliminary research, using a money center bank's swap trading desk and its traders' connections, a possible deal has started taking shape.  Another company would be willing to pay our company a floating rate payment priced at 3-month Libor+25bp, while our company would have an obligation to pay a fixed rate of 5.55% annualized, with quarterly settlements. I'm not overly concerned with the other party's reasons for requiring these payments, so we don't have to calculate the other party's final cost. But we do need to remember that fixed-rate swap payments are made on a semiannual basis, based on 30/90/180/360 Accrual Year Fraction, while floating-rate side payments are being made on a quarterly basis, based on Actual/360 Accrual Year Fraction.

I'd like you to calculate what would be the ultimate cost of the loan to our company. For the purpose of this assignment you may ignore the carrying costs and the brokerage feesof the swap arrangement.

1.    Determine the basis for the payment to the lender: 3-month Libor+100bp.
2.    Determine the basis for the payment to the company-counterparty.
3.    Determine the basis for the payment to be received from the company-counterparty.
4.    Determine the basis of the ultimate cost of the payment to the lender to our company.
5.    Calculate both of the following:

a.    The quarterly payment, using appropriate accrual convention if a floating-rate basis for the ultimate cost in Step 4

b.    A semiannual payment using appropriate accrual convention if a fixed-rate basis for the ultimate cost in Step 4

Deliverables

1.    The basis of the ultimate cost of the payment to the lender to our company.  Please include Steps 1-4, as listed above, with details of your calculations.

The calculations for Step 5 above.


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