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 per annum on $5,100,000 of debt for the next two years, with payments due semiannually. LIBOR is currently 3.992% per annum. Spread paid over LIBOR, per annum is 2.000%. 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 7.008% per annum. (CB Solutions' 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?

ANSWER EACH QUESTION

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? The swap for the first six-month period is (Select from the drop-down menu and round to the nearest dollar.) The swap for the second six-month period is (Select from the drop-down menu and round to the nearest dollar.) The swap for the third six-month period is 9 (Select from the drop-down menu and round to the nearest dollar.) The swap for the fourth six-month period is $ (Select from the drop-down menu and round to the nearest dollar.) 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? The swap for the first six-month period is? (Select from the drop-down menu and round to the nearest dollar.) The swap for the second six-month period is (Select from the drop-down menu and round to the nearest dollar.) The swap for the third six-month period is : (Select from the drop-down menu and round to the nearest dollar.) The swap for the fourth six-month period is $ (Select from the drop-down menu and round to the nearest dollar.) To calculate the swap savings (or cost), follow the steps below: First, to calculate the expected LIBOR, use the following formula: Expected LIBOR= Current LIBOR+50 basis points Next, to calculate the expected interest payment rate, use the following formula: Expectedinterestpayment=(-ExpectedLIBOR(for6months))Spread(for6months) Then, to calculate the net interest rate, use the following formula: Now, to calculate the net interest after swap (in dollars), use the following formula: Net interest after = Notional principal Net interest rate swap (in dollars) Then, to calculate the loan agreement interest (in dollars), use the following formula: Loan agreement = Notional principal Expected interest rate interest (in dollars) Finally, to calculate the swap savings (or cost), use the following formula: Swapsavings(orcost)=Netinterestafterswap(indollars) interest (in dollars)