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Assume Facebook has existing floating-rate debt service payments. Facebook's financial managers conclude that interest rates are about to rise. In order to protect the firm
Assume Facebook has existing floating-rate debt service payments. Facebook's financial managers conclude that interest rates are about to rise. In order to protect the firm against rising debt-service payments, Facebook may enter into a swap agreement. Which swap that Facebook should use? O Pay-floating, receive-fixed interest rate swap. Currency swap. O Pay-fixed, receive-floating interest rate swap. Tesla has a floating-rate liability and wants a fixed-rate exposure. They enter into a 2- year quarterly-pay $10 million fixed-for-floating swap as the fixed-rate payer. The counter party is Chase. The fixed rate is 4% and the floating-rate is 90-day LIBOR + 1%, with both calculated based on a 360-day year. Realizations of 90-day LIBOR are: Annualized LIBOR: Current In 1 quarter 3.5% 3% 3.2% In 2 quarters In 3 quarters 3.8% In 4 quarters 4% The swap payment at the end of the 2nd quarter is: $20,000 from Tesla to Chase. $5,000 from Tesla to Chase. $20,000 from Chase to Tesla. $0
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