A European company issues a 5-year euro-denominated bond with a face value of EUR 50,000,000. The company then enters into a 5-year currency swap with a bank to convert the EUR exposure into USD exposure. The notional principals of the swap are EUR 50,000,000 and USD 70,000,000. The European company pays a fixed rate of 5% and the bank pays a fixed rate of 4.5%. Payments are made semiannually on a basis of 30 days per month and 360 days per year. What is the payment from the bank to the company at the end of year 4?
B is correct because the bank’s payments are based upon a notional principal of EUR 50,000,000 and an interest rate of 4.5%. The payment is: EUR 50,000,000 x (.045) x (180/360) = EUR 1,125,000.