5.9 Transforming a Floating-rate Loan to a Fixed-rate (continued) After Company B has entered into the swap, they have 3 sets of cash flows Pays LiBOR plus 0.8% to outside lenders 2. Receives LIBOR from Company a in the swap 3. Pays 5% to Company A in the Swap In essence. b has transformed its variable rate borrowing at LIBOR 80bp to a fixed rate of 5.8% Options, Futures, and Other Derivatives, 4th edition@ 2000 by John C. Hull Tang Yincai, Shanghai Normal UniversityOptions, Futures, and Other Derivatives, 4th edition © 2000 by John C. Hull Tang Yincai, Shanghai Normal University 5.9 Transforming a Floating-rate Loan to a Fixed-rate (continued) • After Company B has entered into the swap, they have 3 sets of cash flows 1. Pays LIBOR plus 0.8% to outside lenders 2. Receives LIBOR from Company A in the swap 3. Pays 5% to Company A in the Swap • In essence, B has transformed its variable rate borrowing at LIBOR + 80bp to a fixed rate of 5.8%