.Journal entries for hedging transactions. Fixed Issue Company issued 9 percent, tixed-rate, semiannual coupon bonds on January 1 at par for $10 million. It simultaneously entered into an interest-rate swap with Counterparty Bank: Fixed will pay the bank at the end of each six-month period if interest rates exceed 9 percent; and the bank will pay Fixed if interest rates are below 9 percent. If the market rate is r on the date of the payment, then the bank will pay Fixed an amount equal to '/2 X (.09

- r) X $10,000,000. The market interest rate is 9 percent at the time of issue. Interest rates decrease to 6 percent by the end of the tirst six-month period, increasing the market value of the bonds to $14 million and increasing the market value of the interest-rate swap by $3.8 million. By the end of the year, interest rates rise to 7 percent and the market value of the bonds decreases to $12.75 million. The market value of the interest-rate swap decreases by $1.1 million during the period from July 1 through December ? 1

.

a. Record journal entries lor the following dates: January I. at the lime of bond issue;

June 30, at the time of the first debt-service payments; and December 31, at the time of the second debt-service payments.

b. Is this a fair-value hedge or a cash-flow hedge? Has the hedge fulfilled its purpose?