Question: A U.S. company has issued floating-rate notes with a maturity of 10 years, an interest rate of (6-month LIBOR+ 0.25%), and total face value of

A U.S. company has issued floating-rate notes with a maturity of 10 years, an interest rate of (6-month LIBOR+ 0.25%), 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 swap. A dealer provides a quote on a 10-year swap whereby the company will pay a fixed rate 5 percent and receive 6-month LIBOR. Interest is paid semiannually. Assume the current LIBOR rate is 4%. 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. Also, what is the dealers first net payment (or profit)? Assume that all payments are semiannual and made on the basis of 180/360.

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