In Australia, the Bank Bill Swap Bid Rate (BBSY) is the institution that sets the interest rate used in the financial markets for the pricing and valuation of Australian dollar securities. Its index rates of interest are used by banks to price the borrowing of money.
Think of the BBSY as the Aussie LIBOR. The BBSY establishes the rate that high quality banks (those with high credit ratings) charge each other for short-term debt financing.
An interest rate swap is a contract entered into by two banks which want to swap streams of interest payments with each other. One bank swaps fixed interest payments in exchange for floating interest payments, dependent on the movement of the BBSY. Reason: one company is betting that the floating interest rate will make more money for them, the other is betting that fixed interest is preferable.
For example: Two banks, Fair Dinkum and Ema Chisit, enter into an interest rate swap. Ema Chisit pays fixed payments to and receives floating payments from company Fair Dinkum. The semi-annual fixed interest rate is 3% and the floating rate is BBSY + 0.35%, to be paid on a semi-annual basis. Payments are to be swapped on a principal amount of $1 million. On the day the payment amount is calculated, Ema Chisit will pay ½ x 3% x $1 million = $16,005 to Fair Dinkum. Assuming the BBSY is 1.90%, Fair Dinkum will remit ½ x (2.90% + 0.35%) x $1 million = $16,250 to Ema Chisit. Floating rate wins.
Related or Semi-related Video
Finance: What is a CUSIP Number?119 Views
Finance, a la shmoop. What is a CUSIP number? Close that's a Cusack number
867-53-09, yeah we know there. So yeah you know when you go to the grocery
store and the cashier swipes your apples eight times across that little bar code [Apple being scanned]
reader thingy and it doesn't work again and again and again and then she finally [Error coming up on the screen]
pulls back the plastic from where the Apple was tagged hunts for her glasses [Cashier putting on her glasses]
and then visually finds the number associated with that Apple and then just
manually types it in. Well that's the fruit equivalent of a CUSIP number [Guy talking in a supermarket]
A CUSIP number is well just that only applied to securities, stocks, bonds even
muni bonds. CUSIP stands for committee on uniforms security identification [The meaning of each letter is shown]
procedures, and is basically just the serial number system of securities, but [CUSIP definition written on a 100 dollar bill]
has nine digits, the first six represent the original issuer of the security like
coca-cola shares when it went public a gazillion years ago. Then the next two [The fix 6 digits are highlighted]
characters refer to that type of security at hand like is it a basic
equity bond, muni bond and the ninth digit is riboflavin yeah it's just there
to be sure the other digits are all accurate and assures that there's no [The 3 digits meaning are shown]
replication in any of the other CUSIP index number sets. So yeah CUSIP numbers
make the securities easier to track because it's awfully hard to get a
microchip into one of them. [Microchip pulled out of a bond certificate]
Up Next
What is a savings & loan versus a bank? Hit play to find out.
What is the process of a loan? Collateral. Do you have it? The bank lending you money wants to be sure that A) they get paid back, and B) they char...
What is the student loan crisis? The student loan crisis describes the situation that faces our country; namely the fact that there is over a trill...
You've seen routing numbers on checks before, but what do they actually do? Hit play to find out.