Alcoa has just made a $10 million issue (face value) of floating rate bonds on...
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Alcoa has just made a $10 million issue (face value) of floating rate bonds on which it pays an interest rate 1% over the LIBOR rate. The bonds are selling at par value. Alcoa is worried that rates are about to rise, and it would like to lock in a fixed interest rate on its borrowings. Alcoa sees that dealers in the swap market are offering swaps of LIBOR for 7%.
What interest rate swap will convert the firms interest obligation into one resembling a synthetic fixed-rate loan?
What interest rate will the firm pay on that synthetic fixed-rate loan?
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