Question
Corporate loans are usually floating-rate liabilities. A firm's liability consists of $1 Billion 3-year loan that carries an interest of LIBOR+1.5%. The interest is paid
Corporate loans are usually floating-rate liabilities. A firm's liability consists of $1 Billion 3-year loan that carries an interest of LIBOR+1.5%. The interest is paid annually.
a.What is the risk associated with this loan? How does a 1% increase in LIBOR impact firm's pre-tax income?
b.The company decides to use the LIBOR swap quotes in the following table to manage this risk. What fixed rate will the company pay on its 3-year loan?
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Fundamentals of Financial Management
Authors: Eugene F. Brigham, Joel F. Houston
13th edition
978-1285027371, 128502737X, 978-1133541141
