7. 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 currently 3.00% 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? b. 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 Notional principal LIBOR, per annum Spread paid over LIBOR, per annum Swap rate, to pay fixed, per annum Values $10 000 000 3,000% 2,000% 6,500% First Second Third Fourth Fifth Sixth Interest & Swap Payments 6-months 6-months 6-months 6-months 6-months 6-months a. LIBOR increases 50 basis pts/6 months 0,500% Expected LIBOR Current loan agreement: Expected LIBOR (for 6 months) Spread (for 6 months) Expected interest payment Swap Agreement: Pay fixed (for 6-months) Receive floating (LIBOR for 6 months) Net interest (loan + swap) Swap savings? Net interest after swap Loan agreement interest Swap savings (swap cost) b. LIBOR decreases 25 basis pts/6 months -0,250% Expected LIBOR Current loan agreement: Expected LIBOR (for 6 months) Spread (for 6 months) Expected interest payment Swap Agreement: Pay fixed (for 6-months) Receive floating (LIBOR for 6 months) Net interest (loan + swap) Swap savings? Net interest after swap Loan agreement interest Swap savings (swap cost) 7. 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 currently 3.00% 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? b. 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 Notional principal LIBOR, per annum Spread paid over LIBOR, per annum Swap rate, to pay fixed, per annum Values $10 000 000 3,000% 2,000% 6,500% First Second Third Fourth Fifth Sixth Interest & Swap Payments 6-months 6-months 6-months 6-months 6-months 6-months a. LIBOR increases 50 basis pts/6 months 0,500% Expected LIBOR Current loan agreement: Expected LIBOR (for 6 months) Spread (for 6 months) Expected interest payment Swap Agreement: Pay fixed (for 6-months) Receive floating (LIBOR for 6 months) Net interest (loan + swap) Swap savings? Net interest after swap Loan agreement interest Swap savings (swap cost) b. LIBOR decreases 25 basis pts/6 months -0,250% Expected LIBOR Current loan agreement: Expected LIBOR (for 6 months) Spread (for 6 months) Expected interest payment Swap Agreement: Pay fixed (for 6-months) Receive floating (LIBOR for 6 months) Net interest (loan + swap) Swap savings? Net interest after swap Loan agreement interest Swap savings (swap cost)
