Interest Rate Swap Case Essay

734 Words Nov 26th, 2011 3 Pages
Goodrich-Rabobank Interest Rate Swap In 1983, both B.F. Goodrich and Rabobank needed to execute external financing in order to raise 50 million dollars for ongoing operations. Goodrich wanted to raise the money through debt financing, but because their bonds were BBB- rated, they would have to pay a steep interest rate for a fixed rate. However, the Solomon brothers had an idea. Goodrich could borrow with a floating rate that was tied to LIBOR and then swap interest payments with a Euromarket bank that had raised funds in the fixed rate Eurobond market. A London bank approached Rabobank and proposed a large fixed rate Eurobond issue with the intention of swapping interest payments with a US corporation. Goodrich offered a 50 million …show more content…
Therefore, Goodrich will save 1.3% - x, while Rabobank will end up saving y – 1.8% on their interest rate. After breaking it down further by using the figures in the case, it can be assumed that y comes out to be 20 basis points and x is 100 basis points. Plugging those values back into the original equations you can deduce that Goodrich saves about 30 basis points because they will only be paying 12.2%. Rabobank will save about 20 basis points and Morgan will collect the original $125,000 and then 75 basis points in fees. After adding up all of the savings, it comes out to be 1%. This is an attractive deal to the savings bank. With organizing this swap, they end up earning a good amount of money. They will have a good amount of administrative fees in order to receive all of the money from the swap and then proceed to pay out the right amount each period and keep up with the LIBOR rates to adjust the floating rate note. However, with collecting the original $125,000 and then gaining the 75 basis points in fees, they will be able to cover all of their expenses in the swap and make this a profitable investment. For the Goodrich and Rabobank this is a win-win situation for them. Because of entering the swap and analyzing the numbers from the case, both of them will end up saving money. The rates they would have had if they sold their notes without swapping would have been higher than what they end up having to pay now. Even with

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