7. (6 points) Peter O'Connoly, the treasurer of Guiness, believes interest rates are going to rise, so she wants to swap her future floating rate interest payments for fixed rates. Presently, he is paying per annum on $10,000,000 of debt for the next 3 years, with payments due semiannually. LIBOR is currently3.00% per annum. O'Connoly has just made an interest payment today, so the next payment is due six months from today. O'Connoly finds that he can swap her current floating rate payments for fixed payments of 6.50% per annum. (Guiness's weighted average cost of capital is 12%, which O'Connoly 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 Peter save or cost her company by making this swap?

a. If LIBOR falls at the rate of 25 basis points per 6-month period, starting tomorrow, how much does Peter save or cost her company by making this swap?

Assumptions

Values

Notional principal

$10000000

LIBOR, per annum

3,000%

Spread paid over LIBOR, per annum

2,000%

Swap rate, to pay fixed, per annum

6,500%