Question
Argus Equipment Corp. has just issued fixed rate debt at 9.75 percent. Yet, it prefers to convert its financing to incur a floating rate on
Argus Equipment Corp. has just issued fixed rate debt at 9.75 percent. Yet, it prefers to convert its financing to incur a floating rate on its debt. It engages in a three-year interest rate swap in which it swaps variable rate payments of LIBOR plus 1.25% in exchange for receiving fixed payments of 9.75%. The interest rates are applied to an amount that represents the principal from its recent debt issue in order to determine the interest payments due at the end of each year for the next three years. Argus expects that the LIBOR will be 8.5% at the end of the first year, 8.0% at the end of the second year, and 7.5% at the end of the third year. Determine the financing rate that Argus expects to pay on its debt in each of the three years after considering the effect of the interest rate swap.
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