Hi Ronald, Thank you for this video - It was a great explanation and truly helped me get a basic understanding - which is what I've been searching for!! On the slide showing Results of the Swap, you indicate that AAA now gets a short term loan at LIBOR, saving 1/4%. I understand that they're now only paying LIBOR and saving that 1/4%, but how does this change the fact that their original loan was a long term loan? My current understanding is that AAA retains is original loan, but instead of paying a fixed rate of 12%, it now pays a floating LIBOR rate. Similarly, BBB has a short term loan that it's now paying on a fixed rate instead of LIBOR + 1/2%. I guess what I'm asking, is that when the Swap is completed, how does it affect the original loan each party takes out? Does it convert AAA's long term loan into a short term, and BBB's short term loan into a long term, or do they both just reap the benefits of a better rate for their current loan situation? THANK YOU FOR ANY HELP!
Yes AAA is able to covert the long term loan to a short term one based on LIBOR and BBB converts its short term loan to a fixed rate loan. They also each get a better rate by engaging in the swap.
Thanks Ronald! I guess where I get lost is in that AAA is still responsible for their original loan, and that was likely with a different institution than the Bank or Brokerage facilitating the Swap. So How does the Swap convince the original lender that they will now pay that back short term instead of long term and vice-versa? Thanks for your help - I'm really intrigued by swaps and want to make sure I wrap my head around it correctly and not make assumptions.
This was a great explanation Mr. Moy.
Very informative video. Thank you !
I got a little lost when the diagram was first shown and the percents were different, but the ending sheet brought it all together.
Hi Ronald, Thank you for this video - It was a great explanation and truly helped me get a basic understanding - which is what I've been searching for!!
On the slide showing Results of the Swap, you indicate that AAA now gets a short term loan at LIBOR, saving 1/4%. I understand that they're now only paying LIBOR and saving that 1/4%, but how does this change the fact that their original loan was a long term loan? My current understanding is that AAA retains is original loan, but instead of paying a fixed rate of 12%, it now pays a floating LIBOR rate. Similarly, BBB has a short term loan that it's now paying on a fixed rate instead of LIBOR + 1/2%.
I guess what I'm asking, is that when the Swap is completed, how does it affect the original loan each party takes out? Does it convert AAA's long term loan into a short term, and BBB's short term loan into a long term, or do they both just reap the benefits of a better rate for their current loan situation?
THANK YOU FOR ANY HELP!
Yes AAA is able to covert the long term loan to a short term one based on LIBOR and BBB converts its short term loan to a fixed rate loan. They also each get a better rate by engaging in the swap.
Thanks Ronald! I guess where I get lost is in that AAA is still responsible for their original loan, and that was likely with a different institution than the Bank or Brokerage facilitating the Swap. So How does the Swap convince the original lender that they will now pay that back short term instead of long term and vice-versa? Thanks for your help - I'm really intrigued by swaps and want to make sure I wrap my head around it correctly and not make assumptions.
Thanks for the great video!!
so if AAA would have borrowed from bank at LIBOR+0.2%, then in this case AAA would save 0.3% from the swap right?
If everything else is the same, that would be correct.