Question: (a) Turbotec Plc Has 100 Million Of Floating Rate Debt On Its Balance Sheet That Is Due To Be Repaid In 10 Years Time. The Interest Rate Payable Is LIBOR + 3%. Although Interest Rates, Including LIBOR, Are At Historically Low Levels Turbotec Is Concerned That These Rates May Rise In The Future. Required: Discuss In Detail The Techniques Available ...

This question hasn't been answered yet

Ask an expert

(a)

Turbotec Plc has 100 million of floating rate debt on its balance sheet that is due to be repaid in 10 years time. The interest rate payable is LIBOR + 3%. Although interest rates, including LIBOR, are at historically low levels Turbotec is concerned that these rates may rise in the future.

Required:

Discuss in detail the techniques available to Turbotec Plc in order that it may hedge its interest rate risk.

(12 Marks)

(b)

The finance director of S&U Plc is worried that interest rates are likely to rise over the medium term. She is particularly worried as most of S&U's debt pays interest based upon LIBOR. S&U is looking to swap the interest obligations on 200 million of its 15 year floating rate debt for an equivalent 15 year 200 million of fixed rate debt. A swap bank has identified a possible swap partner in Altona. Details of the interest rates both companies would have to pay in the cash market are as follows:

Variable Rate Fixed Rate .

S&U LIBOR + 1% 6%

Altona LIBOR + 3% 7%

The swap bank has agreed to arrange the swap for a fee equivalent of 0.05% per year of the total amount swapped. The remainder of the balance is shared between the two companies with 0.05% in favour of the company that has the absolute advantage.

Required:

Devise a swap that would be beneficial to both S&U and Altona. Give details of how much interest each party will save per year as a result of the interest rate swap and the conditions needed for a swap to be successful.