Question
Please include Excel calculations ABC Corp. has an outstanding debt of $40 million on which it pays a 7 percent fixed interest rate annually. ABC
Please include Excel calculations
ABC Corp. has an outstanding debt of $40 million on which it pays a 7 percent fixed interest rate annually. ABC just made its annual interest payment and has three years remaining until maturity. ABC wants to swap its fixed rate payments for floating rate payments. A bank offers ABC a three-year interest rate swap with annual payments in which ABC will pay LIBOR, currently at 6.3 percent, and receive a 4.6 percent fixed rate on $40 million notional principal. Suppose that LIBOR turns out to be 6.7 percent in one year, 6.8 percent in two years, and 6.9 percent in three years. Including interest payments on ABCs outstanding debt and payments on the swap, what will be ABCs net interest payments for the next three years? | ||||||||||
Interest rate on existing debt | 7% | |||||||||
Notional principal | $40,000,000 | |||||||||
Year | LIBOR | Outstanding debt payment | Fixed leg of swap | Floating leg of swap | Net payment between the parties of the swap agreement | |||||
0 | 6.30% | |||||||||
1 | 6.70% | |||||||||
2 | 6.80% | |||||||||
3 | 6.90% |
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