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INTEREST RATE SWAP

INTEREST RATE SWAP. 11.5% Fixed-Rate Obligation in Eurobond Market. S&L pays interest on $15 million at 11.5%. Southwest Savings Association. Commercial Bank Counterparty. Bank Pays Interest on $15 Million at LIBOR + .25%. Variable-Rate Obligation on Deposits. INTEREST RATE SWAP.

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INTEREST RATE SWAP

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  1. INTEREST RATE SWAP 11.5% Fixed-Rate Obligation in Eurobond Market S&L pays interest on $15 million at 11.5% Southwest Savings Association Commercial BankCounterparty Bank Pays Interest on $15 Millionat LIBOR + .25% Variable-RateObligation on Deposits

  2. INTEREST RATE SWAP SOUTHWEST SAVINGS ASSOCIATION BALANCE SHEET ASSETS Adjustable rate loans (10.5%) $25.5Fixed rate loans (13.50%) $65.8Non-earning assets $ 4.5 $95.8 LIABILITIES & NET WORTH Adjustable rate funds (9.8%) $62.5Fixed-rate funds (11.85%) $28.8Net Worth $ 4.5 $95.8 GAP = $25.5 - $62.5 = -$37.0

  3. INTEREST RATE SWAP SOUTHWEST SAVINGS ASSOCIATION INCOME STATEMENT PROJECTED PRE-TAX EARNINGS REVENUES: Rate Sensitive Assets $2.678 Fixed-Rate Assets $8.883$11.561 INTEREST EXPENSE: Rate-Sensitive Liabilities ($6.125) Fixed-Rate Liabilities ($3.413)($9.538) PRE-TAX EARNINGS $2.023

  4. INTEREST RATE SWAP Projected Pre-Tax Earnings with SWAPand no Interest Rate Change REVENUES: Rate Sensitive Assets $2.678 Fixed-Rate Assets 8.883 Swap Interest Income ($15 at 10.60%) 1.590$13.151INTEREST EXPENSE: Rate-Sensitive Liabilities ($6.125) Fixed-Rate Liabilities (3.413) Swap Payments ($15 at 11.50%) (1.725) ($11.26)PRE-TAX EARNINGS $1.888

  5. INTEREST RATE SWAP Projected Pre-Tax Earnings withInterest Rate Increase REVENUES: Rate Sensitive Assets (at 12.30%) $3.137 Fixed-Rate Assets (at 13.50%) 8.883$12.020INTEREST EXPENSE: Rate-Sensitive Liabilities (at 11.10%) ($6.938) Fixed-Rate Liabilities (at 11.85%) (3.413)($10.351)PRE-TAX EARNINGS $1.669 Without Swap

  6. INTEREST RATE SWAP Projected Pre-Tax Earnings withInterest Rate Increase REVENUES: Rate Sensitive Assets (at 12.30%) $3.137 Fixed-Rate Assets (at 13.50%) 8.883 Swap Interest Income ($15 at 12.20%) 1.830$13.850INTEREST EXPENSE: Rate-Sensitive Liabilities (at 11.10% ($6.938) Fixed-Rate Liabilities (at 11.85%) (3.413) Swap Payments ($15 at 11.50%) (1.725) ($12.076)PRE-TAX EARNINGS $1.774 With Swap

  7. INTEREST RATE SWAP Projected Pre-Tax Earnings withInterest Rate Decrease REVENUES: Rate Sensitive Assets (at 9.50%) $2.423 Fixed-Rate Assets (at 13.50%) 8.883$11.306INTEREST EXPENSE: Rate-Sensitive Liabilities (at 8.90%) ($5.563) Fixed-Rate Liabilities (at 11.85%) (3.413)($8.976)PRE-TAX EARNINGS $2.330 Without Swap

  8. INTEREST RATE SWAP Projected Pre-Tax Earnings withInterest Rate Decrease REVENUES: Rate Sensitive Assets (at 9.50%) $2.423 Fixed-Rate Assets (at 13.50%) 8.883 Swap Interest Income ($15 at 9.55%) 1.433$12.739INTEREST EXPENSE: Rate-Sensitive Liabilities (at 8.90%) ($5.563) Fixed-Rate Liabilities (at 11.85%) (3.413) Swap Payments ($15 at 11.50%) (1.725) ($10.701)PRE-TAX EARNINGS $2.038 With Swap

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