Issue and Description

The upper management of Acme Co. needs to borrow $50 million for twenty years. The bank that they normally work with makes the company a loan at a rate = SOFR + a 100 basis point credit spread, payable annually. Acme Co wants to change their interest rate exposure, so the company enters into a 20 year swap with Initech.

Swap and Interest rate Accrual Assumptions

The fixed payer of the swap has a swap rate for all periods = 4.21431014%.

The fixed payer of the swap pays based on a 30/360 interest accrual.

The floating rate payer on the swap has a swap rate = 12 month SOFR + 0 bps.

The floating rate leg estimated future payments are based on the hypothetical forward SOFR curve (see "Swap Schedule" tab, column D).

The floating rate leg pays on the applicable forward rate for the given period and an ACTUAL 360 interest accrual method.

The swap has annual settlement periods with the first payment on 10/1/2024.

The Swap Schedule tab has been constructed from the perspective of the pay fixed swap payer (this is important when calculating the column J amounts).

Directions: Input the applicable fixed pay rate into the swap schedule (cell G7), colored in light green.

In column H, construct the fixed swap pay rate based on the assumptions above and the swap schedule (notional amount).

In column I, construct the floating rate receipt amount based on the assumptions above and the swap schedule (notional amount).

In column J, determine the net receipt or payment to/from the pay fixed swap payer.

YOU DO NOT HAVE TO MODIFY COLUMN K, only the cells in gray in columns G, H, I and J.

Answer the Following Questions:

1. Considering only its bank loan (i.e. prior to the swap), what is Acme's interest rate exposure - ie is it fixed or floating?

2. When considering both the bank loan and the swap, what is Acme's remaining or net interest rate exposure?

3. What is the effective interest rate that Acme pays when considering both its bank loan and it's interest rate swap?

4. In period/year 2, what is/are the payment amounts on the swap? Do both parties to the swap have to make payments? If so, why? If not, why not?

5. In period/year 12, what is/are the payment amounts on the swap? Do both parties to the swap have to make payments? If so, why? If not, why not?

The below table is constructed from the perspective of the pay fized swap pager