Heather O'Reilly, the treasurer of CB Solutions, believes interest rates are going to rise, so...
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Accounting
Heather O'Reilly, the treasurer of CB Solutions, believes interest rates are going to rise, so she wants to swap her future floating-rate interest payments for fixed rates. Presently, she is paying per annum on
$5,100,000
of debt for the next two years, with payments due semiannually. LIBOR is currently
3.991%
per annum. Spread paid over LIBOR, per annum is
2.000%.
Heather has just made an interest payment today, so the next payment is due six months from now. Heather finds that she can swap her current floating-rate payments for fixed payments of
7.009%
per annum. (CB Solutions' weighted average cost of capital is
12%,
which Heather calculates to be
6%
per 6-month period, compounded semiannually).
a. If LIBOR rises at the rate of 50 basis points per 6-month period, starting tomorrow, how much does Heather save or cost her company by making this swap?
b. If LIBOR falls at the rate of 25 basis points per 6-month period, starting tomorrow, how much does Heather save or cost her company by making this swap?
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