A U S company has issued floating rate notes with a maturity of 10 years, an interest rate of six month LIBOR plus 25 basis points, and total face value of $10 million The company now believes that interest rates will rise and wishes to protect itself against this by entering into an interest rate ...

The company can enter into a swap to pay a fixed rate of 5 percent and re ...

A U.S. company has issued floating-rate notes with a maturity of 10 years, an interest rate of

Question:

A U.S. company has issued floating-rate notes with a of 10 years, an interest rate of six-month LIBOR plus 25 basis points, and total of $10 million. The company now believes that interest rates will rise and wishes to protect itself against this by entering into an interest rate swap. A provides a quote on a 10-year swap whereby the company will pay a fixed rate of 5 percent and receive six-month LIBOR. Interest is paid semiannually. Assume the current LIBOR rate is 4 percent. Indicate how the company can use a swap to convert the debt to a fixed rate. Calculate the first net payment and indicate which party makes the payment. Assume that all payments are semiannual and made on the basis of 180/360.
Dealer
A dealer in the securities market is an individual or firm who stands ready and willing to buy a security for its own account (at its bid price) or sell from its own account (at its ask price). A dealer seeks to profit from the spread between the... Face Value
Face value is a financial term used to describe the nominal or dollar value of a security, as stated by its issuer. For stocks, the face value is the original cost of the stock, as listed on the certificate. For bonds, it is the amount paid to the... Maturity
Maturity is the date on which the life of a transaction or financial instrument ends, after which it must either be renewed, or it will cease to exist. The term is commonly used for deposits, foreign exchange spot, and forward transactions, interest...