Essay on Impact of Interest Rate Swaps

1461 Words Feb 5th, 2012 6 Pages
| Impact of Interest Rate Swaps | | | Janis Vera Todd | BUS 250 International BusinessProfessor Masudur Chowdhury | 3/12/2010 |


The first article that we will look at deals with interest rate swaps is “New Jersey Swap for Unsold Bonds Cost $22,000 a Day (update2)”. This article is about mismanagement and misunderstanding of financial obligations on behalf of New Jersey and the officials of 2004. This administration used financial backing by the Bank of Montreal in an interest-rate swap that was linked to unsold bonds. They were basically gambling with the unknown future of the market that the funds are tied to with a floating interest rate to help cover the budget of building new schools in the future. The problem
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Along with being uneducated with the workings of the interest rate swaps it seems some of the decisions were made more on the level of personal dealings. There are pending investigations to see if “Wall Street banks conspired with brokers to rig bids on contracts” or not (McNichol, 2009). Former mayor Larry Langford has already been convicted of accepting bribes from a banker friend in turn giving that friend underwritten contract. With all these factors taken into consideration it is no wonder that there are such high monthly payments due in these instances.
Since New Jersey was in the situation of not borrowing fast enough to meet its contractual obligations they are revamping that agreement. Under the new terms they are able to suspend the floating-rate payments and lower the fixed rate cost until 2012 (McNichol, 2009). The new agreement also allows New Jersey to avoid the approximate fifty million dollar termination fee by reinstating the original construction bonds. This financial mismanagement in as little as three years would have covered the price of not only typical elementary schools but also the salaries of one hundred and thirteen teachers for three years each. Of course the people responsible for this unfortunate situation are either refusing to answer calls or even hanging up on them and even pretending they have no knowledge of the situation they put the state in.
In the mean time New Jersey is planning on selling some of

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