Interest rate swap You have borrowed floating rate debt. At present, you are paying LIBOR + 1.5% per annum for the next four years, with payments due annually. The next payment is due one year from today. You believe interest rates are going to rise: LIBOR is currently 3.00% per annum and is expected to rise at the rate of 1% per year, Year 1 Year 2 Year 3 Year 4 LIBOR 4.00% 5.00% 6.00% 7.00% How to hedge the interest rate risk using a swap agreement?

If you can swap floating rate for fixed payments of 4.50% per annum, what are your net interest rates in the next four years?

If you borrow $1,000,000, calculate how much interest payment you save or lose each year by making this swap.