Posted: January 10th, 2022
Iluka Resources has recently issued $15 million in floating rate notes in order to fund the next stage of an exploration project. The notes pay an annual coupon of BBSW plus 150 basis points. The company approaches Commonwealth Bank to establish an intermediated vanilla swap. The swap contract sets a fixed rate of 7.60 per cent per annum and a reference rate of the 12-month BBSW.
(a) What is an intermediated vanilla swap?
(b) At the first interest payment date, the BBSW is 7.85 per cent per annum. Draw and fully label a diagram showing all the applicable interest rates at that date.
(c) Which party to the swap contract is required to make the first payment? How much is the payment? Why don’t both parties need to make a payment? (LO 18.6)
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