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.At present she is paying LIBOR + 2% per annum on $5,000,000 of debt for the next two years, with payments due semiannually. LIBOR is currently 4.00% per annum. Ms. O'Reilly has just made an interest payment today, so the next payment is due six months from today.

Ms. O'Reilly finds that she can swap her current floating rate payments for fixed payments of 7.00% per annum.(CB Solution's weighted average cost of capital is 12%, which Ms. O'Reilly calculates to be 6% per six month period, compounded semiannually).

a.LIBOR rises at the rate of 50 basis points per six-months period, starting tomorrow, how much does Ms. O'Reilly save or cost her company by making this swap?

b.LIBOR falls at the rate of 25 basis points per six-months period, starting tomorrow, how much does Ms. O'Reilly save or cost her company by making this swap?

AssumptionsValues

Notional principal$5,000,000

LIBOR, per annum4.000%

Spread paid over LIBOR, per annum 2.000%

Swap rate, to pay fixed, per annum 7.000%