American Airlines (“AAL”) has a ten-year floating rate loan of $50 million at LIBOR plus 120 basis points from Wells Fargo. The floating interests are paid quarterly. AAL fears a rise in interest rates and hence wants to hedge against rising interest rates using the interest rate swap. AAL approaches to a swap dealer, the Bank of America (“BAC”), and gets the fixed swap rate of 2.1% with the exchange of LIBOR for a ten-year swap contract. The swap payments occur quarterly. The day counting is actual/360 based for both counterparties. Assume that today’s six-month LIBOR is 0.98%. What is the (transformed) interest rate that AAL pays with the combination of the original loans (from Wells Fargo) and the swap (with BAC)?

Answer rating: 100% (QA)

The interest rate that AAL pays on floating loanLIBOR12 the net interest that AAL receive under th... View the full answer