Black Corp. currently has $65 million worth of floating rate debts carried at an average rate of
Question:
Black Corp. currently has $65 million worth of floating rate debts carried at an average rate of LIBOR + 2.6% that it would like to hedge against rising interest rates without having to issue fixed rate bonds. Accordingly, they have approached Red Corp. (a swap dealer) about an 8-year interest rate swap with a notional value of $65 million.
If Black can borrow in the fixed rate market at 5.15% and the swap rate is 2.35%, how much money will it be able to save from this arrangement each year (compared to simply issuing fixed rate bonds)?
What net payment is made to Black for a six month period in which LIBOR is 2.6%?
Net Payment = (Swap rate - BA rate) x (notional amount) x (# of days/365)
Advanced Accounting
ISBN: 978-1934319307
2nd edition
Authors: Susan S. Hamlen, Ronald J. Huefner, James A. Largay III