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Vesta Ventures wishes to borrow $10 million for one year. A bank offers an interest-only...

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Finance

  1. Vesta Ventures wishes to borrow $10 million for one year. A bank offers an interest-only loan with quarterly interest payments at a floating rate of 90-day Libor plus 90 bps and full principal repayment due at the end of the one-year term of the loan. Vesta also enters a one-year, quarterly payment interest rate swap as the fixed rate payer to hedge interest rate risk. The swap has a notional principal of $10 million, the floating rate is Libor, and the fixed rate is 3.15%. The loan and the swap utilize a 30/360 day count convention.

Assuming 90-day Libor evolves as given below, what is Vestas projected loan interest payment, net swap payment, and overall net interest payment on the hedged loan each quarter? (3 points)

Quarter

Libor

0

2.90%

1

3.10%

2

3.25%

3

3.50%

4

3.60%

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