Homework:Chapter 8 Homework

Question 1, Problem 8-6 (algorithmic)

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O'Reilly and CB Solutions.Heather O'Reilly, the treasurer of CB Solutions, believes interest rates are going to rise, so she wants to swap her future floating-rate interest payments for fixed rates. Presently, she is paying

LIBOR+2.00%

per annum on

$5,000,000

of debt for the next two years, with payments due semiannually. LIBOR is currently

3.98%

per annum. Heather has just made an interest payment today, so the next payment is due six months from now. Heather finds that she can swap her current floating-rate payments for fixed payments of

7.004%

per annum. (CB Solutions' weighted average cost of capital is

12%,

which Heather calculates to be

6%

per 6-month period, compounded semiannually).a. If LIBOR rises at the rate of

50

basis points per 6-month period, starting tomorrow, how much does Heather save or cost her company by making this swap?b. If LIBOR falls at the rate of

25

basis points per 6-month period, starting tomorrow, how much does Heather save or cost her company by making this swap?