Suppose Eastern Bank offers Gulf Refinery a $150 million floating-rate loan to finance the purchase of its crude oil imports along with a cap. The floating-rate loan has a maturity of 1 year, starts on December 20th, and is reset the next three quarters. The initial quarterly rate is equal to 10%/4; the other rates are set on 3/20, 6/20, and 9/20 equal to one fourth of the annual LIBOR on those dates plus 100 basis points: (LIBOR % + 1%)/4. The cap Eastern Bank is offering Gulf has the following terms:

• Three caplets with expiration dates of 3/20, 6/20, and 9/20
• 
  
• The cap rate on each caplet is 9.5%
• 
  
• The time period for each caplet is .25 per year
• 
  
• The payoffs for each caplet are at the interest payment dates
• 
  
• The reference rate is the LIBOR
• 
  
• Notional principal is $150 million
• 
  
• The cost of the cap is $500,000

 

Show in the table below the company’s quarterly interest payments, caplet cash flows, hedged interest payments (interest minus caplet cash flow), and hedged rate as a proportion of a $150M loan (do not include cap cost) for each period (12/20, 3/20, 6/20, and 9/20) given the following rates: LIBOR = 10% on 3/20, LIBOR = 9.5% on 6/20, and LIBOR = 9%.

 

 

1	2	3	4	5	6	7
Date	LIBOR	Cap Payoff on Payment Date	Loan Interest on Payment Date	Hedged Debt	Hedged Rate	Unhedged Rate
12/20/Y1 3/20/Y1 6/20/Y1 9/20/Y1 12/20/Y2

Answer rating: 100% (QA)

1 Loan Interest on Payment Date Notional Principal x Quarterly Rate 2 Cap Payof... View the full answer