KG Company and Jackson Group enter into a four-year interest rate swap agreement. KG Company is the floating-rate payer and Jackson Group is the fixed-rate payer. Notional principal amount is $20 million and payments are exchanged annually. The fixed-rate payer will pay 6% p.a.; and the floating-rate payer will pay LIBOR plus 120 basis points.

A. What view does KG Company most likely have on the interest rate movement in the next four years? Explain

B. Suppose the LIBOR rates in the next four years are as follows.

LIBOR
Beginning	5.60%
End of year 1	4.50%
End of year 2	5.30%
End of year 3	4.30%
End of year 4	5.50%

Calculate the profit/loss of KG Company at the end of year 1, year 2, year 3 and year 4.

C. A swap contract is like a few forward contracts combined into one contract. Do you agree with the sentence? Explain.

D. The floating-rate payer in swap is viewed as being long the bond market. Do you agree with the statement? Explain.

Answer rating: 100% (QA)

A KG Company most likley believes that the LIBOR will go down and will remain substantially below 6 ... View the full answer