1. Heather O'Reilly, the treasurer of CB Solutions came in very early to her London office this morning to deal with a pressing issue. She believes LIBOR is going to risetoday, precisely on the day in which the rate on her floating rate loan is to be re-stated. Thus, she wants to swap her future floating-rate interest payments for fixed rate payments. At the moment, she is paying LIBOR + 2% per annum on a $5,000,000 liability she expects to carry for the next two years, with interest payments due and re-stated semiannually. Ms. O'Reilly has an interest payment due today, so the next payment is due six months from today. LIBOR is currently 4.00% per annum. However, she expect that rate is about to go up by 50 BPS., affecting the interest payments she'll have to make in six months. In fact. she expects LIBOR to keep increasing by the same amount every six months until the loan principal is paid in two years. Ms. O'Reilly believes she can swap her current floating rate payments for fixed payments of 7.00% per annum, again with interest payable every six months.

a) How much does Ms. O'Reilly save or cost her company by making this swap? Show your computation of the original financing costs and the costs under the swap for the four upcoming semesters.

b) If rather than rising, LIBOR falls at the rate of 25 BPS. ever six months, starting today, how much does Ms. O'Reilly save or cost her company by making this swap? Show your computation of the original financing costs and the costs under the swap for the four upcoming semesters.