03_InterestRateSwaps

*

Interest Rate Swaps

*Interest Rate Swaps: OriginToday there exist an interest rate swap market where trillions of dollars (in notional principal) of swaps of fixed-rate loans for floating-rate loans occur each year.

*Interest Rate Swaps: OriginThe market primarily consist of financial institutions and corporations who use the swap market to hedge more efficiently their liabilities and assets.

Many institutions create synthetic fixed- or floating-rate assets or liabilities with better rates than the rates obtained on direct liabilities and assets.

*Interest Rate Swaps: DefinitionDefinition: A swap is an exchange of cash flows, CFs.

It is a legal arrangement between two parties to exchange specific payments.

*Interest Rate Swaps: TypesThere are four types of swaps:Interest Rate Swaps: Exchange of fixed-rate payments for floating-rate payments

Currency Swaps: Exchange of liabilities in different currencies

Cross-Currency Swaps: Combination of Interest rate and Currency swap

Credit Default Swaps: Exchange of premium payments for default protection

*Plain Vanilla Interest Rate SwapsDefinitionPlain Vanilla or Generic Interest Rate Swap involves the exchange of fixed-rate payments for floating-rate payments.

*Plain Vanilla Interest Rate Swaps: TermsParties to a swap are called counterparties. There are two parties:Fixed-Rate PayerFloating-Rate Payer

Rates:Fixed rate is usually a T-note rate plus basis points.Floating rate is a benchmark rate: LIBOR.

*Plain Vanilla Interest Rate Swaps: TermsReset Frequency: Semiannual

Principal: No exchange of principal

Notional Principal (NP): Interest is applied to a notional principal; the NP is used for calculating the swap payments.

*Plain Vanilla Interest Rate Swaps: TermsMaturity ranges between 3 and 10 years.

Dates: Payments are made in arrears on a semiannual basis:Effective Date is the date interest begins to accruePayment Date is the date interest payments are made

*Plain Vanilla Interest Rate Swaps: TermsNet Settlement Basis: The counterparty owing the greater amount pays the difference between what is owed and what is receivedonly the interest differential is paid.

Documentation: Most swaps use document forms suggested by the International Swap Dealer Association (ISDA) or the British Bankers Association. The ISDA publishes a book of definitions and terms to help standardize swap contracts.

*Web SiteFor information on the International Swap and Derivative Association and size of the markets go to www.isda.org

*Swap TerminologyNote:Fixed-rate payer can also be called the floating-rate receiver and is often referred to as having bought the swap or having a long position.

Floating-rate payer can also be referred to as the fixed-rate receiver and is referred to as having sold the swap and being short.

*Plain Vanilla Interest Rate Swap: ExampleExample:Fixed-rate payer pays 5.5% every six months

Floating-rate payer pays LIBOR every six months

Notional Principal = $10 million

Effective Dates are 3/1 and 9/1 for the next three years

*Plain Vanilla Interest Rate Swap: Example

5.2-1

123456

Effective DatesLIBORFloating-RateFixed-RateNet Interest ReceivedNet Interest Received

Payer's Payment*Payer's Payment**by Fixed-Rate Payerby Floating-Rate Payer

Column 3 - Column 4Column 4 - Column 3

3/1/Y10.045

9/1/Y10.050$225,000$275,000-$50,000$50,000

3/1/Y20.055$250,000$275,000-$25,000$25,000

9/1/Y20.060$275,000$275,000$0$0

3/1/Y30.065$300,000$275,000$25,000-$25,000

9/1/Y30.070$325,000$275,000$50,000-$50,000

3/1/Y4$350,000$275,000$75,000-$75,000

* (LIBOR/2)($10,000,000)

** (.055/2)($10,000,000)

Sheet1

Swap MaturityTreasury YieldBid Swap Spread (BP)Ask Swap Spread (BP)Effective Fixed Swap Rate

2 year4.98%67745.65% - 5.72%

3 year5.17%72765.89% - 5.93%

4 year5.38%69749.07% - 9.12%

5 year5.50%70769.20% - 9.29%

Sheet2

Fixed-Rate Payers Position

Settlement DateNumber of DaysLIBORFixed PaymentFloating PaymentFixed Net Payment

6/10/024.50%

12/10/021834.75%527441.09589041145750069941.0958904111

6/10/031825.00%524558.904109589480277.77777777844281.1263318113

12/10/031835.25%527441.095890411508333.33333333319107.7625570777

6/10/041825.50%524558.904109589530833.333333333-6274.4292237442

12/10/041835.75%527441.095890411559166.666666667-31725.5707762556

6/10/04182524558.904109589581388.888888889-56829.9847792998

Fixed Payment = (.0526)(no. of days/365)($20,000,000)

Floating Payment = LIBOR(no. of days/360)($20,000,000)

syn fixed swap

Swap: Fixed payer's position on 9%/LIBOR Swap; NP = $20M; Maturity = 5 years.

$20M, 5-year FRN paying LIBOR + 100 BP. Synthetic Fixed: FRN and Fixed-Payer's Position

Settlement DateNumber of DaysLIBORFixed PaymentFloating PaymentFixed Net PaymentFRN PaymentFRN + Swap PaymentAnnualized Rate

6/10/027.50%

12/10/021837.75%902465.753424658762500139965.753424658864166.6666666671004132.420091320.1001388889

6/10/031828.00%897534.246575342783611.111111111113923.135464231884722.222222222998645.3576864540.1001388889

12/10/031838.25%902465.753424658813333.33333333389132.42009132449150001004132.420091320.1001388889

6/10/041828.50%897534.246575342834166.66666666763367.5799086759935277.777777778998645.3576864540.1001388889

12/10/041838.75%902465.753424658864166.66666666738299.0867579909965833.3333333331004132.420091320.1001388889

6/10/051829.00%897534.246575342884722.22222222212812.0243531204985833.333333333998645.3576864530.1001388889

12/10/051839.25%902465.753424658915000-12534.24657534241016666.666666671004132.420091320.1001388889

6/10/061829.50%897534.246575342935277.777777778-37743.53120243531036388.88888889998645.3576864530.1001388889

12/10/061839.75%902465.753424658965833.333333333-63367.579908675610675001004132.420091320.1001388889

6/10/0718210.00%897534.246575342985833.333333333-88299.08675799081086944.44444444998645.3576864540.1001388889



FRN Payment = (LIBOR + 100BP)(no. of days/360)($20,000,000)

Annualized Rate = (FRN + Swap Payment)(365/no. of days)/$20,000,000

syn fixed 2




6/10/027.50%

12/10/021837.75%802191.78082191876250039691.7808219179864166.666666667903858.4474885840.0901388889

6/10/031828.00%797808.219178082783611.11111111114197.1080669712884722.222222222898919.3302891930.0901388889

12/10/031838.25%802191.780821918813333.333333333-11141.5525114153915000903858.4474885850.0901388889

6/10/041828.50%797808.219178082834166.666666667-36358.4474885844935277.777777778898919.3302891930.0901388889

12/10/041838.75%802191.780821918864166.666666667-61974.8858447488965833.333333333903858.4474885840.0901388889

6/10/051829.00%797808.219178082884722.222222222-86914.0030441399985833.333333333898919.3302891930.0901388889

12/10/051839.25%802191.780821918915000-112808.2191780821016666.66666667903858.4474885840.0901388889

6/10/061829.50%797808.219178082935277.777777778-137469.5585996961036388.88888889898919.3302891930.0901388889

12/10/061839.75%802191.780821918965833.333333333-163641.5525114151067500903858.4474885840.0901388889

6/10/0718210.00%797808.219178082985833.333333333-188025.1141552511086944.44444444898919.3302891930.0901388889





syn var

Swap: Floating payer's position on 9%/LIBOR Swap; NP = $20M; Maturity = 5 years.

$20M, 5-year, 9% fixed rate loan. Synthetic Variable: Fixed Rate Loan and Floating-Payer's Position

Settlement DateNumber of DaysLIBORFixed PaymentFloating PaymentFloating Payer's Net PaymentFixed-Rate PaymentFixed rate + Swap PaymentAnnualized Rate

6/10/027.50%

12/10/021837.75%902465.753424658762500-139965.753424658902465.7534246587625000.075

6/10/031828.00%897534.246575342783611.111111111-113923.135464231897534.246575342783611.1111111110.0775

12/10/031838.25%902465.753424658813333.333333333-89132.4200913244902465.753424658813333.3333333330.08

6/10/041828.50%897534.246575342834166.666666667-63367.5799086759897534.246575342834166.6666666670.0825

12/10/041838.75%902465.753424658864166.666666667-38299.0867579909902465.753424658864166.6666666670.085

6/10/051829.00%897534.246575342884722.222222222-12812.0243531204897534.246575342884722.2222222220.0875

12/10/051839.25%902465.75342465891500012534.2465753424902465.7534246589150000.09

6/10/061829.50%897534.246575342935277.77777777837743.5312024353897534.246575342935277.7777777780.0925

12/10/061839.75%902465.753424658965833.33333333363367.5799086756902465.753424658965833.3333333330.095

6/10/0718210.00%897534.246575342985833.33333333388299.0867579908897534.246575342985833.3333333330.0975




Annualized Rate = (Fixed Rate + Swap Payment)(360/no. of days)/$20,000,000

Syn var 2

Swap: Floating payer's position on 9.5%/LIBOR Swap; NP = $20M; Maturity = 5 years.



6/10/027.50%

12/10/021837.75%952602.739726028762500-190102.739726028902465.753424658712363.013698630.0700684932

6/10/031828.00%947397.260273973783611.111111111-163786.149162862897534.246575342733748.0974124810.0725684932

12/10/031838.25%952602.739726028813333.333333333-139269.406392694902465.753424658763196.3470319630.0750684932

6/10/041828.50%947397.260273973834166.666666667-113230.593607306897534.246575342784303.6529680360.0775684932

12/10/041838.75%952602.739726028864166.666666667-88436.0730593608902465.753424658814029.6803652970.0800684932

6/10/051829.00%947397.260273973884722.222222222-62675.0380517505897534.246575342834859.2085235920.0825684932

12/10/051839.25%952602.739726028915000-37602.7397260276902465.753424658864863.013698630.0850684932

6/10/061829.50%947397.260273973935277.777777778-12119.4824961949897534.246575342885414.7640791480.0875684932

12/10/061839.75%952602.739726028965833.33333333313230.5936073057902465.753424658915696.3470319630.0900684932

6/10/0718210.00%947397.260273973985833.33333333338436.0730593606897534.246575342935970.3196347030.0925684932





Synfixinv


Investment in $20M, 5-year, FRN paying LIBOR plus 100 BP. Synthetic fixed-rate investment: FRN Investment and Floating-Payer's Position

Settlement DateNumber of DaysLIBORFixed PaymentFloating PaymentFloating Payer's Net PaymentFRN ReturnFixed rate - Swap PaymentAnnualized Rate

6/10/024.50%

12/10/021834.75%601643.835616438457500-144143.835616438559166.666666667703310.5022831050.0701388889

6/10/031825.00%598356.164383562480277.777777778-118078.386605784581388.888888889699467.2754946730.0701388889

12/10/031835.25%601643.835616438508333.333333333-93310.502283105610000703310.5022831050.0701388889

6/10/041825.50%598356.164383562530833.333333333-67522.8310502284631944.444444444699467.2754946730.0701388889

12/10/041835.75%601643.835616438559166.666666667-42477.1689497718660833.333333333703310.5022831050.0701388889

6/10/051826.00%598356.164383562581388.888888889-16967.2754946728682500699467.2754946730.0701388889

12/10/051836.25%601643.8356164386100008356.1643835615711666.666666667703310.5022831050.0701388889

6/10/061826.50%598356.164383562631944.44444444433588.2800608827733055.555555556699467.2754946730.0701388889

12/10/061836.75%601643.835616438660833.33333333359189.4977168948762500703310.5022831050.0701388889

6/10/071827.00%598356.16438356268250084143.8356164383783611.111111111699467.2754946730.0701388889



FRN Return = (LIBOR + 1%)(no. of days/360)($20,000,000)

Annualized Rate = (FRN - Swap Payment)(365/no. of days)/$20,000,000

synflinvoat


Investment of $20M in 5-year bond 7%. Synthetic fixed-rate investment: Fixed Investment and Fixed-Payer's Position

Settlement DateNumber of DaysLIBORFixed PaymentFloating PaymentFixed Payer's Net PaymentFixed Investment ReturnFixed Inv Return - Swap PaymentAnnualized Rate

6/10/024.50%

12/10/021834.75%601643.835616438457500144143.835616438701917.808219178557773.972602740.055625

6/10/031825.00%598356.164383562480277.777777778118078.386605784698082.191780822580003.8051750380.0581597222

12/10/031835.25%601643.835616438508333.33333333393310.502283105701917.808219178608607.3059360730.0606944444

6/10/041825.50%598356.164383562530833.33333333367522.8310502284698082.191780822630559.3607305930.0632291667

12/10/041835.75%601643.835616438559166.66666666742477.1689497718701917.808219178659440.6392694060.0657638889

6/10/051826.00%598356.164383562581388.88888888916967.2754946728698082.191780822681114.9162861490.0682986111

12/10/051836.25%601643.835616438610000-8356.1643835615701917.808219178710273.972602740.0708333333

6/10/061826.50%598356.164383562631944.444444444-33588.2800608827698082.191780822731670.4718417050.0733680556

12/10/061836.75%601643.835616438660833.333333333-59189.4977168948701917.808219178761107.3059360730.0759027778

6/10/071827.00%598356.164383562682500-84143.8356164383698082.191780822782226.027397260.0784375



Fixed Investment Return = 7%(no. of days/365)($20,000,000)

Annualized Rate = (Fixed Inv Return - Swap Payment)(365/no. of days)/$20,000,000

*Interest Rate Swap: PointPoints:If LIBOR > 5.5%, then fixed payer receives the interest differential.

If LIBOR < 5.5%, then floating payer receives the interest differential.

*Interest Rate Swaps Fundamental UseOne of the important uses of swaps is in creating a synthetic fixed- or floating-rate liability or asset that yields a better rate than a conventional or direct one: Synthetic fixed-rate loans and investments

Synthetic floating-rate loans and investments

*A synthetic fixed-rate loan is formed by combining a floating-rate loan with a fixed-rate payers positionConventional Floating-Rate LoanSwap: Fixed-Rate Payer PositionSwap: Fixed-Rate Payer Position

Synthetic Fixed RatePay Floating Rate

Pay Fixed Rate

Receive Floating Rate

Pay Fixed Rate

*Synthetic Fixed-Rate LoanExample: A synthetic fixed-rate loan formed with 2-year, $10,000,000 floating-rate loan with rates set equal to the LIBOR on 3/1 and 9/1 combined with a fixed-rate payers position on the swap just analyzed.

*Synthetic Fixed-Rate Loan

5.2-1

123456




3/1/030.045

9/1/030.05225000275000-5000050000

3/1/040.055250000275000-2500025000

9/1/040.0627500027500000

3/1/050.06530000027500025000-25000

9/1/050.0732500027500050000-50000

3/1/0635000027500075000.0000000001-75000.0000000001

* (LIBOR/2)($10,000,000)

** (.055/2)*($10,000,000)

5.2-2

12345678

SwapSwapSwapLoanSynthetic LoanSynthetic Loan

Effective DatesLIBORFloating-RateFixed-RateNet Interest ReceivedInterest Paid onPayment on SwapEffective

Payer's Payment*Payer's Payment**by Fixed-Rate PayerFloating-Rate Loan*and LoanAnnualized Rate***

Column 3 Column 4Column 6 Column 5

3/1/Y10.045

9/1/Y10.050$225,000$275,000-$50,000$225,000$275,0000.055

3/1/Y20.055$250,000$275,000-$25,000$250,000$275,0000.055

9/1/Y20.060$275,000$275,000$0$275,000$275,0000.055

3/1/Y30.065$300,000$275,000$25,000$300,000$275,0000.055

9/1/Y30.070$325,000$275,000$50,000$325,000$275,0000.055

3/1/Y4$350,000$275,000$75,000$350,000$275,0000.055

* (LIBOR/2)($10,000,000)

** (.055/2)($10,000,000)

*** 2 (Payment on Swap and Loan)/$10,000,000

5.2-3

1234567





3/1/030.045

9/1/030.05225000275000-500002250002750000.055

3/1/040.055250000275000-250002500002750000.055

9/1/040.0627500027500002750002750000.055

3/1/050.065300000275000250003000002750000.055

9/1/050.07325000275000500003250002750000.055

3/1/0635000027500075000.00000000013500002750000.055

* (LIBOR/2)($10,000,000)

** (.055/2)*($10,000,000)


Sheet1


2 year4.98%67745.65% - 5.72%

3 year5.17%72765.89% - 5.93%

4 year5.38%69749.07% - 9.12%

5 year5.50%70769.20% - 9.29%

Sheet2



6/10/024.50%

12/10/021834.75%527441.09589041145750069941.0958904111

6/10/031825.00%524558.904109589480277.77777777844281.1263318113

12/10/031835.25%527441.095890411508333.33333333319107.7625570777

6/10/041825.50%524558.904109589530833.333333333-6274.4292237442

12/10/041835.75%527441.095890411559166.666666667-31725.5707762556

6/10/04182524558.904109589581388.888888889-56829.9847792998



syn fixed swap




6/10/027.50%

12/10/021837.75%902465.753424658762500139965.753424658864166.6666666671004132.420091320.1001388889

6/10/031828.00%897534.246575342783611.111111111113923.135464231884722.222222222998645.3576864540.1001388889

12/10/031838.25%902465.753424658813333.33333333389132.42009132449150001004132.420091320.1001388889

6/10/041828.50%897534.246575342834166.66666666763367.5799086759935277.777777778998645.3576864540.1001388889

12/10/041838.75%902465.753424658864166.66666666738299.0867579909965833.3333333331004132.420091320.1001388889

6/10/051829.00%897534.246575342884722.22222222212812.0243531204985833.333333333998645.3576864530.1001388889

12/10/051839.25%902465.753424658915000-12534.24657534241016666.666666671004132.420091320.1001388889

6/10/061829.50%897534.246575342935277.777777778-37743.53120243531036388.88888889998645.3576864530.1001388889

12/10/061839.75%902465.753424658965833.333333333-63367.579908675610675001004132.420091320.1001388889

6/10/0718210.00%897534.246575342985833.333333333-88299.08675799081086944.44444444998645.3576864540.1001388889





syn fixed 2




6/10/027.50%

12/10/021837.75%802191.78082191876250039691.7808219179864166.666666667903858.4474885840.0901388889

6/10/031828.00%797808.219178082783611.11111111114197.1080669712884722.222222222898919.3302891930.0901388889

12/10/031838.25%802191.780821918813333.333333333-11141.5525114153915000903858.4474885850.0901388889

6/10/041828.50%797808.219178082834166.666666667-36358.4474885844935277.777777778898919.3302891930.0901388889

12/10/041838.75%802191.780821918864166.666666667-61974.8858447488965833.333333333903858.4474885840.0901388889

6/10/051829.00%797808.219178082884722.222222222-86914.0030441399985833.333333333898919.3302891930.0901388889

12/10/051839.25%802191.780821918915000-112808.2191780821016666.66666667903858.4474885840.0901388889

6/10/061829.50%797808.219178082935277.777777778-137469.5585996961036388.88888889898919.3302891930.0901388889

12/10/061839.75%802191.780821918965833.333333333-163641.5525114151067500903858.4474885840.0901388889

6/10/0718210.00%797808.219178082985833.333333333-188025.1141552511086944.44444444898919.3302891930.0901388889





syn var




6/10/027.50%

12/10/021837.75%902465.753424658762500-139965.753424658902465.7534246587625000.075

6/10/031828.00%897534.246575342783611.111111111-113923.135464231897534.246575342783611.1111111110.0775

12/10/031838.25%902465.753424658813333.333333333-89132.4200913244902465.753424658813333.3333333330.08

6/10/041828.50%897534.246575342834166.666666667-63367.5799086759897534.246575342834166.6666666670.0825

12/10/041838.75%902465.753424658864166.666666667-38299.0867579909902465.753424658864166.6666666670.085

6/10/051829.00%897534.246575342884722.222222222-12812.0243531204897534.246575342884722.2222222220.0875

12/10/051839.25%902465.75342465891500012534.2465753424902465.7534246589150000.09

6/10/061829.50%897534.246575342935277.77777777837743.5312024353897534.246575342935277.7777777780.0925

12/10/061839.75%902465.753424658965833.33333333363367.5799086756902465.753424658965833.3333333330.095

6/10/0718210.00%897534.246575342985833.33333333388299.0867579908897534.246575342985833.3333333330.0975





Syn var 2




6/10/027.50%

12/10/021837.75%952602.739726028762500-190102.739726028902465.753424658712363.013698630.0700684932

6/10/031828.00%947397.260273973783611.111111111-163786.149162862897534.246575342733748.0974124810.0725684932

12/10/031838.25%952602.739726028813333.333333333-139269.406392694902465.753424658763196.3470319630.0750684932

6/10/041828.50%947397.260273973834166.666666667-113230.593607306897534.246575342784303.6529680360.0775684932

12/10/041838.75%952602.739726028864166.666666667-88436.0730593608902465.753424658814029.6803652970.0800684932

6/10/051829.00%947397.260273973884722.222222222-62675.0380517505897534.246575342834859.2085235920.0825684932

12/10/051839.25%952602.739726028915000-37602.7397260276902465.753424658864863.013698630.0850684932

6/10/061829.50%947397.260273973935277.777777778-12119.4824961949897534.246575342885414.7640791480.0875684932

12/10/061839.75%952602.739726028965833.33333333313230.5936073057902465.753424658915696.3470319630.0900684932

6/10/0718210.00%947397.260273973985833.33333333338436.0730593606897534.246575342935970.3196347030.0925684932





Synfixinv




6/10/024.50%

12/10/021834.75%601643.835616438457500-144143.835616438559166.666666667703310.5022831050.0701388889

6/10/031825.00%598356.164383562480277.777777778-118078.386605784581388.888888889699467.2754946730.0701388889

12/10/031835.25%601643.835616438508333.333333333-93310.502283105610000703310.5022831050.0701388889

6/10/041825.50%598356.164383562530833.333333333-67522.8310502284631944.444444444699467.2754946730.0701388889

12/10/041835.75%601643.835616438559166.666666667-42477.1689497718660833.333333333703310.5022831050.0701388889

6/10/051826.00%598356.164383562581388.888888889-16967.2754946728682500699467.2754946730.0701388889

12/10/051836.25%601643.8356164386100008356.1643835615711666.666666667703310.5022831050.0701388889

6/10/061826.50%598356.164383562631944.44444444433588.2800608827733055.555555556699467.2754946730.0701388889

12/10/061836.75%601643.835616438660833.33333333359189.4977168948762500703310.5022831050.0701388889

6/10/071827.00%598356.16438356268250084143.8356164383783611.111111111699467.2754946730.0701388889





synflinvoat




6/10/024.50%

12/10/021834.75%601643.835616438457500144143.835616438701917.808219178557773.972602740.055625

6/10/031825.00%598356.164383562480277.777777778118078.386605784698082.191780822580003.8051750380.0581597222

12/10/031835.25%601643.835616438508333.33333333393310.502283105701917.808219178608607.3059360730.0606944444

6/10/041825.50%598356.164383562530833.33333333367522.8310502284698082.191780822630559.3607305930.0632291667

12/10/041835.75%601643.835616438559166.66666666742477.1689497718701917.808219178659440.6392694060.0657638889

6/10/051826.00%598356.164383562581388.88888888916967.2754946728698082.191780822681114.9162861490.0682986111

12/10/051836.25%601643.835616438610000-8356.1643835615701917.808219178710273.972602740.0708333333

6/10/061826.50%598356.164383562631944.444444444-33588.2800608827698082.191780822731670.4718417050.0733680556

12/10/061836.75%601643.835616438660833.333333333-59189.4977168948701917.808219178761107.3059360730.0759027778

6/10/071827.00%598356.164383562682500-84143.8356164383698082.191780822782226.027397260.0784375





*A synthetic floating-rate loan is formed by combining a fixed-rate loan with a floating-rate payers position.Conventional Fixed-Rate LoanSwap: Floating-Rate Payer PositionSwap: Floating-Rate Payer Position

Synthetic Floating Rate

Pay Fixed Rate

Pay Floating Rate

Receive Fixed Rate

Pay Floating Rate

*Synthetic Floating-Rate LoansExample: A synthetic floating-rate loan formed with a 3-year, $10,000,000, 5% fixed-rate loan combined with the floating-rate payers position on the swap just analyzed.

*Synthetic Floating-Rate Loans

5.2-1

123456




3/1/030.045

9/1/030.05225000275000-5000050000

3/1/040.055250000275000-2500025000

9/1/040.0627500027500000

3/1/050.06530000027500025000-25000

9/1/050.0732500027500050000-50000

3/1/0635000027500075000.0000000001-75000.0000000001

* (LIBOR/2)($10,000,000)

** (.055/2)*($10,000,000)

5.2-2

12345678





3/1/030.045

9/1/030.05225000275000-500002250002750000.055

3/1/040.055250000275000-250002500002750000.055

9/1/040.0627500027500002750002750000.055

3/1/050.065300000275000250003000002750000.055

9/1/050.07325000275000500003250002750000.055

3/1/0635000027500075000.00000000013500002750000.055

* (LIBOR/2)($10,000,000)

** (.055/2)*($10,000,000)


5.2-3

12345678



Payer's Payment*Payer's Payment**by Floating-Rate Payer5% Fixed-Rate Loanand LoanAnnualized Rate***

Column 4 Column 3Column 6 Column 5

3/1/Y10.045

9/1/Y10.050$225,000$275,000$50,000$250,000$200,0000.040

3/1/Y20.055$250,000$275,000$25,000$250,000$225,0000.045

9/1/Y20.060$275,000$275,000$0$250,000$250,0000.050

3/1/Y30.065$300,000$275,000-$25,000$250,000$275,0000.055

9/1/Y30.070$325,000$275,000-$50,000$250,000$300,0000.060

3/1/Y4$350,000$275,000-$75,000$250,000$325,0000.065

* (LIBOR/2)($10,000,000)

** (.055/2)($10,000,000)


Sheet1


2 year4.98%67745.65% - 5.72%

3 year5.17%72765.89% - 5.93%

4 year5.38%69749.07% - 9.12%

5 year5.50%70769.20% - 9.29%

Sheet2



6/10/024.50%

12/10/021834.75%527441.09589041145750069941.0958904111

6/10/031825.00%524558.904109589480277.77777777844281.1263318113

12/10/031835.25%527441.095890411508333.33333333319107.7625570777

6/10/041825.50%524558.904109589530833.333333333-6274.4292237442

12/10/041835.75%527441.095890411559166.666666667-31725.5707762556

6/10/04182524558.904109589581388.888888889-56829.9847792998



syn fixed swap




6/10/027.50%

12/10/021837.75%902465.753424658762500139965.753424658864166.6666666671004132.420091320.1001388889

6/10/031828.00%897534.246575342783611.111111111113923.135464231884722.222222222998645.3576864540.1001388889

12/10/031838.25%902465.753424658813333.33333333389132.42009132449150001004132.420091320.1001388889

6/10/041828.50%897534.246575342834166.66666666763367.5799086759935277.777777778998645.3576864540.1001388889

12/10/041838.75%902465.753424658864166.66666666738299.0867579909965833.3333333331004132.420091320.1001388889

6/10/051829.00%897534.246575342884722.22222222212812.0243531204985833.333333333998645.3576864530.1001388889

12/10/051839.25%902465.753424658915000-12534.24657534241016666.666666671004132.420091320.1001388889

6/10/061829.50%897534.246575342935277.777777778-37743.53120243531036388.88888889998645.3576864530.1001388889

12/10/061839.75%902465.753424658965833.333333333-63367.579908675610675001004132.420091320.1001388889

6/10/0718210.00%897534.246575342985833.333333333-88299.08675799081086944.44444444998645.3576864540.1001388889





syn fixed 2




6/10/027.50%

12/10/021837.75%802191.78082191876250039691.7808219179864166.666666667903858.4474885840.0901388889

6/10/031828.00%797808.219178082783611.11111111114197.1080669712884722.222222222898919.3302891930.0901388889

12/10/031838.25%802191.780821918813333.333333333-11141.5525114153915000903858.4474885850.0901388889

6/10/041828.50%797808.219178082834166.666666667-36358.4474885844935277.777777778898919.3302891930.0901388889

12/10/041838.75%802191.780821918864166.666666667-61974.8858447488965833.333333333903858.4474885840.0901388889

6/10/051829.00%797808.219178082884722.222222222-86914.0030441399985833.333333333898919.3302891930.0901388889

12/10/051839.25%802191.780821918915000-112808.2191780821016666.66666667903858.4474885840.0901388889

6/10/061829.50%797808.219178082935277.777777778-137469.5585996961036388.88888889898919.3302891930.0901388889

12/10/061839.75%802191.780821918965833.333333333-163641.5525114151067500903858.4474885840.0901388889

6/10/0718210.00%797808.219178082985833.333333333-188025.1141552511086944.44444444898919.3302891930.0901388889





syn var




6/10/027.50%

12/10/021837.75%902465.753424658762500-139965.753424658902465.7534246587625000.075

6/10/031828.00%897534.246575342783611.111111111-113923.135464231897534.246575342783611.1111111110.0775

12/10/031838.25%902465.753424658813333.333333333-89132.4200913244902465.753424658813333.3333333330.08

6/10/041828.50%897534.246575342834166.666666667-63367.5799086759897534.246575342834166.6666666670.0825

12/10/041838.75%902465.753424658864166.666666667-38299.0867579909902465.753424658864166.6666666670.085

6/10/051829.00%897534.246575342884722.222222222-12812.0243531204897534.246575342884722.2222222220.0875

12/10/051839.25%902465.75342465891500012534.2465753424902465.7534246589150000.09

6/10/061829.50%897534.246575342935277.77777777837743.5312024353897534.246575342935277.7777777780.0925

12/10/061839.75%902465.753424658965833.33333333363367.5799086756902465.753424658965833.3333333330.095

6/10/0718210.00%897534.246575342985833.33333333388299.0867579908897534.246575342985833.3333333330.0975





Syn var 2




6/10/027.50%

12/10/021837.75%952602.739726028762500-190102.739726028902465.753424658712363.013698630.0700684932

6/10/031828.00%947397.260273973783611.111111111-163786.149162862897534.246575342733748.0974124810.0725684932

12/10/031838.25%952602.739726028813333.333333333-139269.406392694902465.753424658763196.3470319630.0750684932

6/10/041828.50%947397.260273973834166.666666667-113230.593607306897534.246575342784303.6529680360.0775684932

12/10/041838.75%952602.739726028864166.666666667-88436.0730593608902465.753424658814029.6803652970.0800684932

6/10/051829.00%947397.260273973884722.222222222-62675.0380517505897534.246575342834859.2085235920.0825684932

12/10/051839.25%952602.739726028915000-37602.7397260276902465.753424658864863.013698630.0850684932

6/10/061829.50%947397.260273973935277.777777778-12119.4824961949897534.246575342885414.7640791480.0875684932

12/10/061839.75%952602.739726028965833.33333333313230.5936073057902465.753424658915696.3470319630.0900684932

6/10/0718210.00%947397.260273973985833.33333333338436.0730593606897534.246575342935970.3196347030.0925684932





Synfixinv




6/10/024.50%

12/10/021834.75%601643.835616438457500-144143.835616438559166.666666667703310.5022831050.0701388889

6/10/031825.00%598356.164383562480277.777777778-118078.386605784581388.888888889699467.2754946730.0701388889

12/10/031835.25%601643.835616438508333.333333333-93310.502283105610000703310.5022831050.0701388889

6/10/041825.50%598356.164383562530833.333333333-67522.8310502284631944.444444444699467.2754946730.0701388889

12/10/041835.75%601643.835616438559166.666666667-42477.1689497718660833.333333333703310.5022831050.0701388889

6/10/051826.00%598356.164383562581388.888888889-16967.2754946728682500699467.2754946730.0701388889

12/10/051836.25%601643.8356164386100008356.1643835615711666.666666667703310.5022831050.0701388889

6/10/061826.50%598356.164383562631944.44444444433588.2800608827733055.555555556699467.2754946730.0701388889

12/10/061836.75%601643.835616438660833.33333333359189.4977168948762500703310.5022831050.0701388889

6/10/071827.00%598356.16438356268250084143.8356164383783611.111111111699467.2754946730.0701388889





synflinvoat




6/10/024.50%

12/10/021834.75%601643.835616438457500144143.835616438701917.808219178557773.972602740.055625

6/10/031825.00%598356.164383562480277.777777778118078.386605784698082.191780822580003.8051750380.0581597222

12/10/031835.25%601643.835616438508333.33333333393310.502283105701917.808219178608607.3059360730.0606944444

6/10/041825.50%598356.164383562530833.33333333367522.8310502284698082.191780822630559.3607305930.0632291667

12/10/041835.75%601643.835616438559166.66666666742477.1689497718701917.808219178659440.6392694060.0657638889

6/10/051826.00%598356.164383562581388.88888888916967.2754946728698082.191780822681114.9162861490.0682986111

12/10/051836.25%601643.835616438610000-8356.1643835615701917.808219178710273.972602740.0708333333

6/10/061826.50%598356.164383562631944.444444444-33588.2800608827698082.191780822731670.4718417050.0733680556

12/10/061836.75%601643.835616438660833.333333333-59189.4977168948701917.808219178761107.3059360730.0759027778

6/10/071827.00%598356.164383562682500-84143.8356164383698082.191780822782226.027397260.0784375





*Swaps as Bond PositionsSwaps can be viewed as a combination of a fixed-rate bond and flexible-rate note (FRN).

A fixed-rate payer position is equivalent to Buying a FRN paying the LIBOR and Shorting a fixed-rate bond at the swaps fixed rate.

From the previous example, the fixed-rate payers swaps CFs can be replicated by: Selling at par a 3-year bond, paying a 5.5% fixed rate and a principal of $10,000,000 (semiannual payments) and Purchasing a 3-year, $10,000,000 FRN with the rate reset every six months at the LIBOR.

*Swaps as Bond PositionsA floating-rate payer position is equivalent to Shorting a FRN at the LIBOR and Buying a fixed-rate bond at the swap fixed rate

From the previous example, the floating-rate payers swaps CFs can be replicated by: Selling a 3-year, $10,000,000 FRN paying the LIBOR and Purchasing 3-year, $10,000,000, 5.5% fixed-rate bond at par

*Swaps as Eurodollar Futures PositionsA swap can also be viewed as a series of Eurodollar futures contracts.

Consider a short position in a Eurodollar strip in which the short holder agrees to sell 10 Eurodollar deposits at the CMEindex price of 94.5 (or discount yield of RD = 5.5%) withEach of the contracts having a face value of $1,000,000 and maturity of 6 months The expirations on the strip being March 1st and September 1st for a period of two and half years

*Swaps as Eurodollar Futures PositionsWith the index at 94.5, the contract price on one Eurodollar futures contract is $972,500:

The next slide shows the cash flows at the expiration dates from closing the 10 short Eurodollar contracts at the same assumed LIBOR used in the previous swap example, with the Eurodollar settlement index being 100 LIBOR.

*Swaps as Eurodollar Futures Positions

5.2-1

123456




3/1/030.045

9/1/030.05225000275000-5000050000

3/1/040.055250000275000-2500025000

9/1/040.0627500027500000

3/1/050.06530000027500025000-25000

9/1/050.0732500027500050000-50000

3/1/0635000027500075000.0000000001-75000.0000000001

* (LIBOR/2)($10,000,000)

** (.055/2)*($10,000,000)

5.2-2

12345678





3/1/030.045

9/1/030.05225000275000-500002250002750000.055

3/1/040.055250000275000-250002500002750000.055

9/1/040.0627500027500002750002750000.055

3/1/050.065300000275000250003000002750000.055

9/1/050.07325000275000500003250002750000.055

3/1/0635000027500075000.00000000013500002750000.055

* (LIBOR/2)($10,000,000)

** (.055/2)*($10,000,000)


5.2-3

12345678





3/1/030.045

9/1/030.05225000275000500002500002000000.04

3/1/040.055250000275000250002500002250000.045

9/1/040.0627500027500002500002500000.05

3/1/050.065300000275000-250002500002750000.055

9/1/050.07325000275000-500002500003000000.06

3/1/06350000275000-75000.00000000012500003250000.065

* (LIBOR/2)($10,000,000)

** (.055/2)*($10,000,000)


5.2-4

1234

Closing DatesLIBOR %fTCash Flow*

10[f0 fT]

9/1/Y15.00$975,000-$25,000

3/1/Y25.50$972,500$0

9/1/Y26.00$970,000$25,000

3/1/Y36.50$967,500$50,000

9/1/Y37.00$965,000$75,000

*f0 = 972,500

Swap quote


2 year4.98%67745.65% - 5.72%

3 year5.17%72765.89% - 5.93%

4 year5.38%69746.07% - 6.12%

5 year5.50%70766.20% - 6.26%

6.26swap



6/10/025.50%

12/10/021835.75%627715.068493151559166.66666666768548.4018264841

6/10/031826.00%624284.931506849581388.88888888942896.0426179605

12/10/031836.25%627715.06849315161000017715.0684931509

6/10/041826.50%624284.931506849631944.444444444-7659.512937595

12/10/041836.75%627715.068493151660833.333333333-33118.2648401825

6/10/04182624284.931506849682500-58215.0684931506



syn fixed swap




6/10/027.50%

12/10/021837.75%902465.753424658762500139965.753424658864166.6666666671004132.420091320.1001388889

6/10/031828.00%897534.246575342783611.111111111113923.135464231884722.222222222998645.3576864540.1001388889

12/10/031838.25%902465.753424658813333.33333333389132.42009132449150001004132.420091320.1001388889

6/10/041828.50%897534.246575342834166.66666666763367.5799086759935277.777777778998645.3576864540.1001388889

12/10/041838.75%902465.753424658864166.66666666738299.0867579909965833.3333333331004132.420091320.1001388889

6/10/051829.00%897534.246575342884722.22222222212812.0243531204985833.333333333998645.3576864530.1001388889

12/10/051839.25%902465.753424658915000-12534.24657534241016666.666666671004132.420091320.1001388889

6/10/061829.50%897534.246575342935277.777777778-37743.53120243531036388.88888889998645.3576864530.1001388889

12/10/061839.75%902465.753424658965833.333333333-63367.579908675610675001004132.420091320.1001388889

6/10/0718210.00%897534.246575342985833.333333333-88299.08675799081086944.44444444998645.3576864540.1001388889





syn fixed 2




6/10/027.50%

12/10/021837.75%802191.78082191876250039691.7808219179864166.666666667903858.4474885840.0901388889

6/10/031828.00%797808.219178082783611.11111111114197.1080669712884722.222222222898919.3302891930.0901388889

12/10/031838.25%802191.780821918813333.333333333-11141.5525114153915000903858.4474885850.0901388889

6/10/041828.50%797808.219178082834166.666666667-36358.4474885844935277.777777778898919.3302891930.0901388889

12/10/041838.75%802191.780821918864166.666666667-61974.8858447488965833.333333333903858.4474885840.0901388889

6/10/051829.00%797808.219178082884722.222222222-86914.0030441399985833.333333333898919.3302891930.0901388889

12/10/051839.25%802191.780821918915000-112808.2191780821016666.66666667903858.4474885840.0901388889

6/10/061829.50%797808.219178082935277.777777778-137469.5585996961036388.88888889898919.3302891930.0901388889

12/10/061839.75%802191.780821918965833.333333333-163641.5525114151067500903858.4474885840.0901388889

6/10/0718210.00%797808.219178082985833.333333333-188025.1141552511086944.44444444898919.3302891930.0901388889





syn var




6/10/027.50%

12/10/021837.75%902465.753424658762500-139965.753424658902465.7534246587625000.075

6/10/031828.00%897534.246575342783611.111111111-113923.135464231897534.246575342783611.1111111110.0775

12/10/031838.25%902465.753424658813333.333333333-89132.4200913244902465.753424658813333.3333333330.08

6/10/041828.50%897534.246575342834166.666666667-63367.5799086759897534.246575342834166.6666666670.0825

12/10/041838.75%902465.753424658864166.666666667-38299.0867579909902465.753424658864166.6666666670.085

6/10/051829.00%897534.246575342884722.222222222-12812.0243531204897534.246575342884722.2222222220.0875

12/10/051839.25%902465.75342465891500012534.2465753424902465.7534246589150000.09

6/10/061829.50%897534.246575342935277.77777777837743.5312024353897534.246575342935277.7777777780.0925

12/10/061839.75%902465.753424658965833.33333333363367.5799086756902465.753424658965833.3333333330.095

6/10/0718210.00%897534.246575342985833.33333333388299.0867579908897534.246575342985833.3333333330.0975





Syn var 2




6/10/027.50%

12/10/021837.75%952602.739726028762500-190102.739726028902465.753424658712363.013698630.0700684932

6/10/031828.00%947397.260273973783611.111111111-163786.149162862897534.246575342733748.0974124810.0725684932

12/10/031838.25%952602.739726028813333.333333333-139269.406392694902465.753424658763196.3470319630.0750684932

6/10/041828.50%947397.260273973834166.666666667-113230.593607306897534.246575342784303.6529680360.0775684932

12/10/041838.75%952602.739726028864166.666666667-88436.0730593608902465.753424658814029.6803652970.0800684932

6/10/051829.00%947397.260273973884722.222222222-62675.0380517505897534.246575342834859.2085235920.0825684932

12/10/051839.25%952602.739726028915000-37602.7397260276902465.753424658864863.013698630.0850684932

6/10/061829.50%947397.260273973935277.777777778-12119.4824961949897534.246575342885414.7640791480.0875684932

12/10/061839.75%952602.739726028965833.33333333313230.5936073057902465.753424658915696.3470319630.0900684932

6/10/0718210.00%947397.260273973985833.33333333338436.0730593606897534.246575342935970.3196347030.0925684932





Synfixinv




6/10/024.50%

12/10/021834.75%601643.835616438457500-144143.835616438559166.666666667703310.5022831050.0701388889

6/10/031825.00%598356.164383562480277.777777778-118078.386605784581388.888888889699467.2754946730.0701388889

12/10/031835.25%601643.835616438508333.333333333-93310.502283105610000703310.5022831050.0701388889

6/10/041825.50%598356.164383562530833.333333333-67522.8310502284631944.444444444699467.2754946730.0701388889

12/10/041835.75%601643.835616438559166.666666667-42477.1689497718660833.333333333703310.5022831050.0701388889

6/10/051826.00%598356.164383562581388.888888889-16967.2754946728682500699467.2754946730.0701388889

12/10/051836.25%601643.8356164386100008356.1643835615711666.666666667703310.5022831050.0701388889

6/10/061826.50%598356.164383562631944.44444444433588.2800608827733055.555555556699467.2754946730.0701388889

12/10/061836.75%601643.835616438660833.33333333359189.4977168948762500703310.5022831050.0701388889

6/10/071827.00%598356.16438356268250084143.8356164383783611.111111111699467.2754946730.0701388889





synflinvoat




6/10/024.50%

12/10/021834.75%601643.835616438457500144143.835616438701917.808219178557773.972602740.055625

6/10/031825.00%598356.164383562480277.777777778118078.386605784698082.191780822580003.8051750380.0581597222

12/10/031835.25%601643.835616438508333.33333333393310.502283105701917.808219178608607.3059360730.0606944444

6/10/041825.50%598356.164383562530833.33333333367522.8310502284698082.191780822630559.3607305930.0632291667

12/10/041835.75%601643.835616438559166.66666666742477.1689497718701917.808219178659440.6392694060.0657638889

6/10/051826.00%598356.164383562581388.88888888916967.2754946728698082.191780822681114.9162861490.0682986111

12/10/051836.25%601643.835616438610000-8356.1643835615701917.808219178710273.972602740.0708333333

6/10/061826.50%598356.164383562631944.444444444-33588.2800608827698082.191780822731670.4718417050.0733680556

12/10/061836.75%601643.835616438660833.333333333-59189.4977168948701917.808219178761107.3059360730.0759027778

6/10/071827.00%598356.164383562682500-84143.8356164383698082.191780822782226.027397260.0784375





MBD000B2C9E.unknown

*Swaps as Eurodollar Futures PositionsComparing the fixed-rate payer's net receipts shown in Column 5 of the first exhibit (Slide 14) with the cash flows from the short positions on the Eurodollar strip shown in Slide 27, one can see that the two positions yield the same numbers.

*Swaps as Eurodollar Futures PositionsNote there are some differences between the Eurodollar strip and the swap:

First, a 6month differential occurs between the swap payment and the futures payments. This time differential is a result of the interest payments on the swap being determined by the LIBOR at the beginning of the period, whereas the futures position's profit is based on the LIBOR at the end of its period.

Second, the futures contract is on a Eurodollar deposit with a maturity of 6 months instead of the standard 3 months.

*Swaps as Eurodollar Futures PositionsCredit Risk: On a futures contract, the parties transfer credit risk to the exchange. The exchange then manages the risk by requiring margin accounts. Swaps, on the other hand, are exposed to credit risk.

Marketability: Swaps are not traded on an exchange like futures and therefore are not as liquid as futures.

*Swaps as Eurodollar Futures PositionsStandardization: Swaps are more flexible in design than futures that are standardized.

Cash Flow Timing: CFs on swaps are based on the LIBOR 6 months earlier; CFs on futures are based on the current LIBOR.

*Swap Market StructureSwap Banks: The market for swaps is organized through a group of brokers and dealers collectively referred to as swap banks.As brokers, swap banks try to match counterparties.

As dealers, swap banks take temporary positions as fixed or floating players; often hedging their positions with positions in Eurodollar futures contracts or with spot fixed-rate and floating-rate bond positions.

*Swap Market StructureBrokered Swaps: The first interest rate swaps were very customized deals between counterparties with the parties often negotiating and transacting directly between themselves.

*Swap Market StructureBrokered Swaps: The financial institutions role in a brokered swap was to bring the parties together and to provide information; their continuing role in the swap after it was established was minimal; they received a fee for facilitating the swap.

Note: The financial institution does not assume any credit risk with a brokered swap.The counterparties assume the credit risk and must make their own assessment of default potential.

*Swap Market StructureDealers Swaps: One of the problems with brokered swaps is that it requires each party to have knowledge of the other partys risk profile.

This problem led to more financial institutions taking positions as dealers in a swapacting as market makers.

*Swap Market StructureDealers Swaps: With dealer swaps, the swap bank acts as swap dealer making commitments to enter a swap as a counterparty before the other end party has been located. In this market, the end parties contract separately with the swap bank, who acts as a counterparty to each.

*Swap Market StructureDealers Swaps: FeaturesActing as swap dealers, financial institutions serve an intermediary function.

The end parties assume the credit risk of the financial institution instead of that of the other end party.

Small or no swap fee.

The swap dealers compensation comes from a markup on the bid-ask spread extended to the end parties. The spread is reflected on the fixed rate side.

*Swap Market StructureDealers Swaps: FeaturesBecause the financial institution is exposed to default risk, the bid-ask spread should reflect that risk.

Because the swap dealer often makes commitments to one party before locating the other, it is exposed to interest rate movements.

*Swap Market StructureDealers Swaps: FeaturesWarehousing: To minimize its exposure to market risk, the swap dealer can hedge her swap position by taking a position in a Eurodollar futures, T-bond, FRN, or spot Eurodollar contract.

This practice is referred to as warehousing.

*Swap Market StructureDealers Swaps: FeaturesSize Problem: Swap dealers often match a swap agreement with multiple counterparties.

For example, a fixed for floating swap between a swap dealer and Party A with a notional principal of $50,000,000 might be matched with two floating for fixed swaps with notional principals of $25,000,000 each.

*Swap Market Structure

*Swap Market StructureDealers Swaps: FeaturesRunning a Dynamic Book: Any swap commitment can be effectively hedged through a portfolio of alternative positionsother swaps, spot positions in T-notes and FRNs, and futures positions.

This approach to swap market management is referred to as running a dynamic book.

*Swap Market Price QuotesBy convention, the floating rate is quoted flat without basis point adjustments; e.g., LIBOR flat.

The fixed rate is quoted in terms of the on-the-run (newly issued) T-note or T-bond YTM and swap spread.

*Swap Market Price QuotesSwap spread: Swap dealers usually quote two different swap spreadsOne for deals in which they pay the fixed rateOne in which they receive the fixed rate

*Swap Market Price QuotesSwap Spread:80/86 dealer buys at 80bp over T-note yield and sells at 86 over T-note yield.

That is, the dealer willTake the fixed payers position at a fixed rate equal to 80 BP over the T-note yield and

Take the floating payers position, receiving 86 bp above the T-note yield.

*Swap Market Price QuotesSwap Rate = (Bid Rate + Ask Rate)/2Swap Bank Quote OfferingsExample:

5.2-1

123456




3/1/030.045

9/1/030.05225000275000-5000050000

3/1/040.055250000275000-2500025000

9/1/040.0627500027500000

3/1/050.06530000027500025000-25000

9/1/050.0732500027500050000-50000

3/1/0635000027500075000.0000000001-75000.0000000001

* (LIBOR/2)($10,000,000)

** (.055/2)*($10,000,000)

5.2-2

12345678





3/1/030.045

9/1/030.05225000275000-500002250002750000.055

3/1/040.055250000275000-250002500002750000.055

9/1/040.0627500027500002750002750000.055

3/1/050.065300000275000250003000002750000.055

9/1/050.07325000275000500003250002750000.055

3/1/0635000027500075000.00000000013500002750000.055

* (LIBOR/2)($10,000,000)

** (.055/2)*($10,000,000)


5.2-3

12345678





3/1/030.045

9/1/030.05225000275000500002500002000000.04

3/1/040.055250000275000250002500002250000.045

9/1/040.0627500027500002500002500000.05

3/1/050.065300000275000-250002500002750000.055

9/1/050.07325000275000-500002500003000000.06

3/1/06350000275000-75000.00000000012500003250000.065

* (LIBOR/2)($10,000,000)

** (.055/2)*($10,000,000)


5.2-4

1234

Closing DatesLIBORfTCash Flow*

10[f0 - fT]

9/1/035975000-25000

3/1/045.59725000

9/1/04697000025000

3/1/056.596750050000

9/1/05796500075000

f0 = 972,500

15.3-2

Swap MaturityTreasury YieldBid Swap Spread (BP)Ask Swap Spread (BP)Fixed Swap Rate SpreadSwap Rate

2 year4.98%67745.65% - 5.72%5.69%

3 year5.17%72765.89% - 5.93%5.91%

4 year5.38%69746.07% - 6.12%6.10%

5 year5.50%70766.20% - 6.26%6.23%

15.3-3



6/10/025.50%

12/10/021835.75%627715.068493151559166.66666666768548.4018264841

6/10/031826.00%624284.931506849581388.88888888942896.0426179605

12/10/031836.25%627715.06849315161000017715.0684931509

6/10/041826.50%624284.931506849631944.444444444-7659.512937595

12/10/041836.75%627715.068493151660833.333333333-33118.2648401825

6/10/04182624284.931506849682500-58215.0684931506



15.4-1

123456

Maturity in YearsYield on T-NoteSwap Spread (BP)Swap RateZero Coupon RateImplied 1-year Forward Rates5 year4 year3 year2 YEAR1 YEAR

10.041000.050.050.05600857144.76190476194.76190476190.04761904764.7619047619100

20.045800.0530.053080.06504564185.05046965475.05046965470.050504696595.2236257615

30.05700.0570.057290.07511527465.5034601885.5034601880.055034601999.9855305234

40.055650.06150.0621760.08520902525.901227016484.46350414230.153158346

50.06620.06620.067469778.295285946799.779338747

99.5123475678

Year5-YEAR

10.05

20.05308

30.05729

40.0621760.059012054578.5622771259

50.06746970.06147629572.1476546259

0.1204883495150.70993175180.0007994719

15.5-1




6/10/027.50%

12/10/021837.75%802191.78082191876250039691.7808219179864166.666666667903858.4474885840.0901388889

6/10/031828.00%797808.219178082783611.11111111114197.1080669712884722.222222222898919.3302891930.0901388889

12/10/031838.25%802191.780821918813333.333333333-11141.5525114153915000903858.4474885850.0901388889

6/10/041828.50%797808.219178082834166.666666667-36358.4474885844935277.777777778898919.3302891930.0901388889

12/10/041838.75%802191.780821918864166.666666667-61974.8858447488965833.333333333903858.4474885840.0901388889

6/10/051829.00%797808.219178082884722.222222222-86914.0030441399985833.333333333898919.3302891930.0901388889

12/10/051839.25%802191.780821918915000-112808.2191780821016666.66666667903858.4474885840.0901388889

6/10/061829.50%797808.219178082935277.777777778-137469.5585996961036388.88888889898919.3302891930.0901388889

12/10/061839.75%802191.780821918965833.333333333-163641.5525114151067500903858.4474885840.0901388889

6/10/0718210.00%797808.219178082985833.333333333-188025.1141552511086944.44444444898919.3302891930.0901388889





15.5-2




6/10/027.50%

12/10/021837.75%952602.739726028762500-190102.739726028902465.753424658712363.013698630.0700684932

6/10/031828.00%947397.260273973783611.111111111-163786.149162862897534.246575342733748.0974124810.0725684932

12/10/031838.25%952602.739726028813333.333333333-139269.406392694902465.753424658763196.3470319630.0750684932

6/10/041828.50%947397.260273973834166.666666667-113230.593607306897534.246575342784303.6529680360.0775684932

12/10/041838.75%952602.739726028864166.666666667-88436.0730593608902465.753424658814029.6803652970.0800684932

6/10/051829.00%947397.260273973884722.222222222-62675.0380517505897534.246575342834859.2085235920.0825684932

12/10/051839.25%952602.739726028915000-37602.7397260276902465.753424658864863.013698630.0850684932

6/10/061829.50%947397.260273973935277.777777778-12119.4824961949897534.246575342885414.7640791480.0875684932

12/10/061839.75%952602.739726028965833.33333333313230.5936073057902465.753424658915696.3470319630.0900684932

6/10/0718210.00%947397.260273973985833.33333333338436.0730593606897534.246575342935970.3196347030.0925684932





15.5-3




6/10/024.50%

12/10/021834.75%2882876.712328772287500-595376.7123287682795833.333333333391210.04566210.0676388889

6/10/031825.00%2867123.287671232401388.88888889-465734.3987823452906944.444444443372678.843226790.0676388889

12/10/031835.25%2882876.712328772541666.66666667-341210.04566210130500003391210.04566210.0676388889

6/10/041825.50%2867123.287671232654166.66666667-212956.6210045673159722.222222223372678.843226790.0676388889

12/10/041835.75%2882876.712328772795833.33333333-87043.37899543483304166.666666673391210.04566210.0676388889

6/10/051826.00%2867123.287671232906944.4444444439821.156773211434125003372678.843226790.0676388889

12/10/051836.25%2882876.712328773050000167123.2876712323558333.333333333391210.04566210.0676388889

6/10/061826.50%2867123.287671233159722.22222222292598.9345509893665277.777777783372678.843226790.0676388889

12/10/061836.75%2882876.712328773304166.66666667421289.95433789938125003391210.04566210.0676388889

6/10/071827.00%2867123.287671233412500545376.7123287673918055.555555563372678.843226790.0676388889





syn fixed swap




6/10/027.50%

12/10/021837.75%902465.753424658762500139965.753424658864166.6666666671004132.420091320.1001388889

6/10/031828.00%897534.246575342783611.111111111113923.135464231884722.222222222998645.3576864540.1001388889

12/10/031838.25%902465.753424658813333.33333333389132.42009132449150001004132.420091320.1001388889

6/10/041828.50%897534.246575342834166.66666666763367.5799086759935277.777777778998645.3576864540.1001388889

12/10/041838.75%902465.753424658864166.66666666738299.0867579909965833.3333333331004132.420091320.1001388889

6/10/051829.00%897534.246575342884722.22222222212812.0243531204985833.333333333998645.3576864530.1001388889

12/10/051839.25%902465.753424658915000-12534.24657534241016666.666666671004132.420091320.1001388889

6/10/061829.50%897534.246575342935277.777777778-37743.53120243531036388.88888889998645.3576864530.1001388889

12/10/061839.75%902465.753424658965833.333333333-63367.579908675610675001004132.420091320.1001388889

6/10/0718210.00%897534.246575342985833.333333333-88299.08675799081086944.44444444998645.3576864540.1001388889





syn var




6/10/027.50%

12/10/021837.75%902465.753424658762500-139965.753424658902465.7534246587625000.075

6/10/031828.00%897534.246575342783611.111111111-113923.135464231897534.246575342783611.1111111110.0775

12/10/031838.25%902465.753424658813333.333333333-89132.4200913244902465.753424658813333.3333333330.08

6/10/041828.50%897534.246575342834166.666666667-63367.5799086759897534.246575342834166.6666666670.0825

12/10/041838.75%902465.753424658864166.666666667-38299.0867579909902465.753424658864166.6666666670.085

6/10/051829.00%897534.246575342884722.222222222-12812.0243531204897534.246575342884722.2222222220.0875

12/10/051839.25%902465.75342465891500012534.2465753424902465.7534246589150000.09

6/10/061829.50%897534.246575342935277.77777777837743.5312024353897534.246575342935277.7777777780.0925

12/10/061839.75%902465.753424658965833.33333333363367.5799086756902465.753424658965833.3333333330.095

6/10/0718210.00%897534.246575342985833.33333333388299.0867579908897534.246575342985833.3333333330.0975





Synfixinv




6/10/024.50%

12/10/021834.75%601643.835616438457500-144143.835616438559166.666666667703310.5022831050.0701388889

6/10/031825.00%598356.164383562480277.777777778-118078.386605784581388.888888889699467.2754946730.0701388889

12/10/031835.25%601643.835616438508333.333333333-93310.502283105610000703310.5022831050.0701388889

6/10/041825.50%598356.164383562530833.333333333-67522.8310502284631944.444444444699467.2754946730.0701388889

12/10/041835.75%601643.835616438559166.666666667-42477.1689497718660833.333333333703310.5022831050.0701388889

6/10/051826.00%598356.164383562581388.888888889-16967.2754946728682500699467.2754946730.0701388889

12/10/051836.25%601643.8356164386100008356.1643835615711666.666666667703310.5022831050.0701388889

6/10/061826.50%598356.164383562631944.44444444433588.2800608827733055.555555556699467.2754946730.0701388889

12/10/061836.75%601643.835616438660833.33333333359189.4977168948762500703310.5022831050.0701388889

6/10/071827.00%598356.16438356268250084143.8356164383783611.111111111699467.2754946730.0701388889





synflinvoat




6/10/024.50%

12/10/021834.75%601643.835616438457500144143.835616438701917.808219178557773.972602740.055625

6/10/031825.00%598356.164383562480277.777777778118078.386605784698082.191780822580003.8051750380.0581597222

12/10/031835.25%601643.835616438508333.33333333393310.502283105701917.808219178608607.3059360730.0606944444

6/10/041825.50%598356.164383562530833.33333333367522.8310502284698082.191780822630559.3607305930.0632291667

12/10/041835.75%601643.835616438559166.66666666742477.1689497718701917.808219178659440.6392694060.0657638889

6/10/051826.00%598356.164383562581388.88888888916967.2754946728698082.191780822681114.9162861490.0682986111

12/10/051836.25%601643.835616438610000-8356.1643835615701917.808219178710273.972602740.0708333333

6/10/061826.50%598356.164383562631944.444444444-33588.2800608827698082.191780822731670.4718417050.0733680556

12/10/061836.75%601643.835616438660833.333333333-59189.4977168948701917.808219178761107.3059360730.0759027778

6/10/071827.00%598356.164383562682500-84143.8356164383698082.191780822782226.027397260.0784375





Put-call Parity

Values at Expiration of Put Swaption and Synthetic Put Swaption consisting of Call Swaption and Forward Contract

Swap Rates on 2-Year Generic Swap6%7%8%

Long Put Swaption: Right to pay 7%/receive LIBOR00PV(8%-7%)

Long Call Swaption: Right to Receive 7%/pay LIBORPV(7%-6%)00

Swap from Forward: Pay 7%/Receive LIBORPV(6%-7%)PV(7%-7%)PV(8%-7%)

Net Value00PV(8%-7%)

PV = present value of two-year cash flows

MBD000B2C9E.unknown

*Swap Market Price QuotesExample of Swap Quote and Terms5-Year Swap

Swap Agreement:Initiation Date = June 10, Y1Maturity Date = June 10, Y6Effective Dates: 6/10 and 12/10NP = $20,000,000Fixed-Rate Payer: Pay = 6.26% (semiannual)/ receive LIBORFloating-Rate Payer: Pay LIBOR/Receive 6.20% (semiannual)LIBOR determined in advance and paid in arrears

*Swap Market Price QuotesNote:The fixed and floating rates are not directly comparable. The T-note assumes a 365-day basis and the LIBOR assumes 360.The rates need to be prorated to the actual number of days that have elapsed between settlement dates to determine the actual payments.Formulas:

*Swap Market Price QuotesCash Flow for Fixed-Rate Payer paying 6.26%

5.2-1

123456




3/1/030.045

9/1/030.05225000275000-5000050000

3/1/040.055250000275000-2500025000

9/1/040.0627500027500000

3/1/050.06530000027500025000-25000

9/1/050.0732500027500050000-50000

3/1/0635000027500075000.0000000001-75000.0000000001

* (LIBOR/2)($10,000,000)

** (.055/2)*($10,000,000)

5.2-2

12345678





3/1/030.045

9/1/030.05225000275000-500002250002750000.055

3/1/040.055250000275000-250002500002750000.055

9/1/040.0627500027500002750002750000.055

3/1/050.065300000275000250003000002750000.055

9/1/050.07325000275000500003250002750000.055

3/1/0635000027500075000.00000000013500002750000.055

* (LIBOR/2)($10,000,000)

** (.055/2)*($10,000,000)


5.2-3

12345678





3/1/030.045

9/1/030.05225000275000500002500002000000.04

3/1/040.055250000275000250002500002250000.045

9/1/040.0627500027500002500002500000.05

3/1/050.065300000275000-250002500002750000.055

9/1/050.07325000275000-500002500003000000.06

3/1/06350000275000-75000.00000000012500003250000.065

* (LIBOR/2)($10,000,000)

** (.055/2)*($10,000,000)


Swap quote


2 year4.98%67745.65% - 5.72%

3 year5.17%72765.89% - 5.93%

4 year5.38%69746.07% - 6.12%

5 year5.50%70766.20% - 6.26%

6.26swap



6/10/Y15.50%

12/10/Y11835.75%$627,715.07$559,166.67$68,548.40

6/10/Y21826.00%$624,284.93$581,388.89$42,896.04

12/10/Y21836.25%$627,715.07$610,000.00$17,715.07

6/10/Y31826.50%$624,284.93$631,944.44-$7,659.51

12/10/Y31836.75%$627,715.07$660,833.33-$33,118.26

6/10/Y4182$624,284.93$682,500.00-$58,215.07



syn fixed swap




6/10/027.50%

12/10/021837.75%902465.753424658762500139965.753424658864166.6666666671004132.420091320.1001388889

6/10/031828.00%897534.246575342783611.111111111113923.135464231884722.222222222998645.3576864540.1001388889

12/10/031838.25%902465.753424658813333.33333333389132.42009132449150001004132.420091320.1001388889

6/10/041828.50%897534.246575342834166.66666666763367.5799086759935277.777777778998645.3576864540.1001388889

12/10/041838.75%902465.753424658864166.66666666738299.0867579909965833.3333333331004132.420091320.1001388889

6/10/051829.00%897534.246575342884722.22222222212812.0243531204985833.333333333998645.3576864530.1001388889

12/10/051839.25%902465.753424658915000-12534.24657534241016666.666666671004132.420091320.1001388889

6/10/061829.50%897534.246575342935277.777777778-37743.53120243531036388.88888889998645.3576864530.1001388889

12/10/061839.75%902465.753424658965833.333333333-63367.579908675610675001004132.420091320.1001388889

6/10/0718210.00%897534.246575342985833.333333333-88299.08675799081086944.44444444998645.3576864540.1001388889





syn fixed 2




6/10/027.50%

12/10/021837.75%802191.78082191876250039691.7808219179864166.666666667903858.4474885840.0901388889

6/10/031828.00%797808.219178082783611.11111111114197.1080669712884722.222222222898919.3302891930.0901388889

12/10/031838.25%802191.780821918813333.333333333-11141.5525114153915000903858.4474885850.0901388889

6/10/041828.50%797808.219178082834166.666666667-36358.4474885844935277.777777778898919.3302891930.0901388889

12/10/041838.75%802191.780821918864166.666666667-61974.8858447488965833.333333333903858.4474885840.0901388889

6/10/051829.00%797808.219178082884722.222222222-86914.0030441399985833.333333333898919.3302891930.0901388889

12/10/051839.25%802191.780821918915000-112808.2191780821016666.66666667903858.4474885840.0901388889

6/10/061829.50%797808.219178082935277.777777778-137469.5585996961036388.88888889898919.3302891930.0901388889

12/10/061839.75%802191.780821918965833.333333333-163641.5525114151067500903858.4474885840.0901388889

6/10/0718210.00%797808.219178082985833.333333333-188025.1141552511086944.44444444898919.3302891930.0901388889





syn var



03_InterestRateSwaps

Documents

fixed rate

floating rate

benchmark rate

rate swap market

fixedrate loans

fixedrate receiver

floatingrate assets

floatingrate loans