Example of an Interest Rate Swap Firm B 5.20% Bank Y Swap Bank LIBOR LIBOR +.2% If Firm B borrows floating from their bank at LIBOR + 0.20% and takes up the swap bank on their offer of 5.1—5.2 they can convert their floating rate debt into a fixed rate debt at 5.40% B's all-in-cost: = –LIBOR + LIBOR + 0.20% + 5.20% = 5.40% 14-11
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