A corporation has issued a $10 million issue of floating-rate bonds on which it pays an interest

Question:

A corporation has issued a $10 million issue of floating-rate bonds on which it pays an interest rate 1% over the LIBOR rate. The bonds are selling at par value. The firm is worried that rates are about to rise, and it would like to lock in a fixed interest rate on its borrowings. The firm sees that dealers in the swap market are offering swaps of LIBOR for 7%. What swap arrangement will convert the firm's borrowings to a synthetic fixed-rate loan? What interest rate will it pay on that synthetic fixed-rate loan?

Corporation
A Corporation is a legal form of business that is separate from its owner. In other words, a corporation is a business or organization formed by a group of people, and its right and liabilities separate from those of the individuals involved. It may...