A pays the 7% on the notional 1mn every duration to B. B pays LIBOR + 1% on that notional 1mn every duration to A. In period 1, it still pays $80,000 so that we can write that in every duration In duration 2, it still pays $80,000 as well as then its going to obtain 7% every period from firm A So it would certainly get $70,000 yet its going to be paying LIBOR + 1% So in Period 1, its going to pay $60,000. Net you pay 50, you obtain 70 so thats a component of, you are still paying 10 as well as you pay another 60 So internet is your going to pay 70k in period 1 as well as after that in period 2, you” re going to pay 60k So currently Comapny A is paying a fixed 8% every period.
A pays the 7% on the notional 1mn every duration to B. B pays LIBOR + 1% on that notional 1mn every duration to A. Internet internet it pays 70, it pays 70 two times however after that it obtains back 60. In period 2, now LIBOR modifications to 4% and also so A will have to pay 4% + the 2% on its financing which is 6% or $60,000. In duration 1, it still pays $80,000 so that we can create that in every duration In duration 2, it still pays $80,000 as well as then its going to obtain 7% every duration from business A So it would obtain $70,000 however its going to be paying LIBOR + 1% So in Period 1, its going to pay $60,000. Internet you pay 50, you get 70 so thats a component of, you are still paying 10 and you pay an additional 60 So net is your going to pay 70k in duration 1 as well as after that in period 2, you” re going to pay 60k So now Comapny A is paying a taken care of 8% every duration.
