Smith Co. and Johnson Inc. entered into an interest rate swap with a notional amount of $1,500,000 with annual settlement (payment dates). Smith Co. believes that the interest rates are going to rise in coming years and would like to receive a floating interest rate. On the other hand, Johnson Inc. expects interest rates to decline next year and therefore would like to receive a fixed interest rate to hedge against the potential risk.

At initiation, the fixed rate was 5.5%, LIBOR was 3.5% and the spread was 200 basis points. One year later, LIBOR drops to 3.1%. Which party would be receiving a net payment and how much would it be?

Review Later

A)Johnson Inc. will receive a net payment of $6,000.

B)Johnson Inc. will receive a net payment of $4,500.

C)Smith Co. will receive a net payment of $6,000.

D)Smith Co. will receive a net payment of $5,500.