Question: 1. Starbucks Co. that has issued floating-rate notes now believes that interest rates will rise. It decides to protect itself against this possibility by entering

1. Starbucks Co. that has issued floating-rate notes now believes that interest rates will rise. It decides to protect itself against this possibility by entering into an interest rate swap with a dealer. In this swap, the notional principal is $25 million and the company will pay a fixed rate of 5.5 percent and receive LIBOR. The current LIBOR is 5 percent. Calculate the first payment and indicate which party (Starbucks or the dealer) pays which. Assume that floating-rate payments will be made on the basis of 90/360 and fixed-rate payments will be made on the basis of 90/365.

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