Question 1 2 marks

1. Black Corp. currently has $65 million worth of floating rate debts carried at an average rate of LIBOR + 2.6% that it would like to hedge against rising interest rates without having to issue fixed rate bonds. Accordingly, they have approached Red Corp. (a swap dealer) about an 8-year interest rate swap with a notional value of $65 million. If Black can borrow in the fixed rate market at 5.15% and the swap rate is 2.35%, how much money will it be able to save from this arrangement each year (compared to simply issuing fixed rate bonds)?

2. What net payment is made to Black for a six month period in which LIBOR is 2.6%?

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