Question
Company Y has borrowed $1B by issuing floating rate 3-year bonds at a rate of Libor + 150 bps. The interest is paid quarterly based
Company Y has borrowed $1B by issuing floating rate 3-year bonds at a rate of Libor + 150 bps. The interest is paid quarterly based on 3-month Libor at the beginning of the period. 3-month Libor currently is 15 bps. To be clear, the 3-month Libor rate is quoted as an annual rate of interest. Current 3-year treasury rates are 0.50% and the current 3-year swap spread is 20 basis points. To better match its cash flow behavior, the company decides to swap the bond into a fixed rate payment obligation.
a. Will the company be paying or receiving fixed on the swap it enters into and what is the fixed rate on the swap?
b. What is the companys resulting fixed rate exposure?
c. One year later the company decides to terminate the swap because it believes interest rates are heading lower. 2-year treasury rates have moved to 0.85% and 2-year swap spreads have moved to 15bps. What is the companys profit or loss on the terminated swap?
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