# Swap Invoice Explanation

Swap invoices frequently cause confusion as they are billed separately from the loan.

#### Interest Rate Assumptions

LIBOR 2.00%

Loan Spread 2.00%

Floating Rate Today 4.00%

Swap Rate 2.50%

Loan Spread 2.00%

Fixed Rate 4.50%

#### Swap Invoices Explained – CPA’s

##### Borrower Pays

Borrower pays on loan 4.00%

Borrower pays on swap 4.50%

Total 8.50%

##### Borrower Receives

Borrower receives on swap 4.00%

Total 4.00%

The borrower’s effective fixed rate is therefore 8.50% – 4.00% = 4.50%. This matches the swap rate quoted above.

Now, let’s assume LIBOR is at 6.00%.

##### Borrower Pays

Borrower pays on loan 8.00%

Borrower pays on swap 4.50%

Total 12.50%

##### Borrower Receives

Borrower receives on swap 8.00%

Total 8.00%

The borrower’s effective fixed rate is therefore 12.50% – 8.00% = 4.50%. This matches the swap rate quoted above.

#### Swap Invoices Explained – Borrowers

##### Loan Payment

Borrower pays2.00% + 2.00% = 4.00%

##### Swap Payment

Borrower pays 2.50% + 2.00% = 4.50%

Borrower receives 2.00% + 2.00% = 4.00%

Borrower Net Pays 0.50%

Add the two invoices together to determine the effective interest rate.

The effective rate is therefore 4.00% + 0.50% = 4.50%. This matches the swap rate above.

Now, let’s assume LIBOR is at 6.00%.

##### Loan Payment

Borrower pays 6.00% + 2.00% = 8.00%

##### Swap Payment

Borrower pays 2.50% + 2.00% = 4.50%

Borrower receives 6.00% + 2.00% = 8.00%

*Borrower Net Receives* 3.50%

The effective rate is 8.00% – 3.50% = 4.50%

#### Sample Payment Invoices with Principal – Mechanics

Assume a $25mm loan with monthly principal of $33,000 in a month with 30 days.

#### Interest Rate Assumptions

Floating Rate 4.00%

Floating interest payment will be $25,000,000 * 4.00% * 30/360 = $83,333.33.

Swap rate locked was 4.50%

Fixed interest payment will be $25,000,000 * 4.50% * 30/360 = $93,750.

Principal of $33,000 per the Note.

With a traditional fixed rate loan of 4.50%, the monthly P&I payment should be $126,671.33 as follows:

Principal $ 32,921.33

Interest $ 93,750.00

Total $126,671.33

How the actual mechanics will work:

##### Loan Invoice

Principal $ 32,921.33

Interest $ 83,333.33

Borrower Pays $116,254.66

##### Swap Invoice

Borrower pays $93,750.00

Borrower receives $83,333.33

Borrower Net Pays $10,416.67

Add the two invoices together to determine the total payment.

The total payment is $116,254.66 + $10,416.67 = $126,671.33. This matches the payment from above in the traditional fixed rate loan scenario.