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% per annum on $5,000,000 of debt for the next two years, with payments due semiannually. LIBOR is currently 4.00% 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 7.00% per annum. (CB Solution’s 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?