Several years ago a company entered a three-year pay fixed/receive floating interest rate swap on a notional principal of $100 million. The fixed rate of the swap is 4.5% and the floating rate is six-month LIBOR. Swap cash flows are exchanged at six-monthly intervals.  What is the company's next net swap cash flow if six-month LIBOR was 3.43% at the last swap exchange date?  Ignore the $ sign and comma separator e.g. an answer of $3,285,000 should be written as 3285000. 


The company's next net cash flow in the interest rate swap can be calculated by determining the difference between the fixed and floating interest payments. Here's how:

1. **Notional principal**: 100,000,000
2. **Fixed rate**: 4.5% per annum
3. **Floating rate (LIBOR)**: 3.43% per annum
4. **Payment frequency**: Every six months

For a six-month period, the fixed and floating payments are calculated based on half the annual rates. Let’s break it down step by step:

### 1. **Fixed Payment**:
The fixed payment is based on the fixed rate of 4.5% per annum, and we calculate it for six months (which is half a year).

\[
\text{Fixed Payment} = 100,000,000 \times \frac{4.5\%}{2} = 100,000,000 \times 0.0225 = 2,250,000
\]

### 2. **Floating Payment**:
The floating payment is based on the floating rate of 3.43% per annum, and we calculate it for six months (again, half a year).

\[
\text{Floating Payment} = 100,000,000 \times \frac{3.43\%}{2} = 100,000,000 \times 0.01715 = 1,715,000
\]

### 3. **Net Cash Flow**:
The net cash flow is the difference between the fixed payment and the floating payment:

\[
\text{Net Cash Flow} = 2,250,000 - 1,715,000 = 535,000
\]

### Conclusion:
The company's next net swap cash flow will be **535000**.

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Do you want more details or have any questions?  
Here are five related questions to expand on this:

1. How would the net swap cash flow change if the floating rate increases to 4%?
2. What is the impact of increasing the notional principal to 150 million on the swap payments?
3. How do the net cash flows affect the company's risk exposure in this interest rate swap?
4. Can you explain the significance of LIBOR in interest rate swaps, and what alternatives exist since LIBOR is being phased out?
5. How would changing the fixed rate to 5% impact the company’s net cash flow?

**Tip:** Swaps are often used by companies to hedge against interest rate fluctuations; understanding both the fixed and floating components is essential for effective risk management.

Several years ago a company entered a three-year pay fixed/receive floating interest rate swap on a notional principal of $100 million. The fixed rate of the swap is 4.5% and the floating rate is six-month LIBOR. Swap cash flows are exchanged at six-monthly intervals. What is the company's next net swap cash flow if six-month LIBOR was 3.43% at the last swap exchange date?

Learn how to calculate the next net swap cash flow for a company involved in an interest rate swap with a notional principal of $100 million. The problem features a 4.5% fixed rate, 3.43% LIBOR floating rate, and involves calculating the difference between the fixed and floating interest payments. Suitable for undergraduate finance students.

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