On January 1, 2014, Cougar Company received a two-year $500,000 loan. The loan calls for payments to made at the end of each year based on the prevailing market rate at January 1 of each year. The interest rate at January 1, 2014, was 10 percent. Aggie company also has a two-year $500,000 loan, but Aggie's loan carries a fixed interest rate of 10 percent. Cougar Company does not want to bear the risk that interest rates may increase in year two of the loan. Aggie Company believes that rates may decrease and they would prefer to have variable debt. So the two companies enter into an interest rate swap agreement whereby Aggie agrees to make Cougar's interest payment in 2014 and Cougar likewise agrees to make Aggie's interest payment in 2014. The two companies agree to make settlement payments, for the difference only, on December 31, 2014. If the interest rate on January 1, 2014, is 12 percent, what will be Cougar's settlement payment to/from Aggie?

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Answer rating: 100% (QA)

Swap receipt will occur as the interest ... View the full answer