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You are the treasurer of a Golden Eagle Corporation that, one year ago, funded an investment project by raising $500 in debt. The corporation issued
You are the treasurer of a Golden Eagle Corporation that, one year ago, funded an investment project by raising $500 in debt. The corporation issued (sold) $500 million of 3-year floating-rate notes with a total annual coupon-interest of (6-month SOFR + 40 bps). The coupon interest is paid semi-annually (that is, the corporation pays one-half of the total annual interest payment every 6 months).
You become concerned that interest rates will rise substantially and wish to convert the remaining 2-year floating-rate (that is, variable-rate) loan into a 2-year fixed rate loan. You can enter a 2-year swap in which the fixed rate payer pays the fixed rate of 2.60% and the floating-rate payer pays the 6-month SOFR rate. The net payments on the swap will occur semi- annually exactly on the same days that your corporation has to pay interest on its floating-rate loan.
1) How can you convert your corporation's floating-rate loan into a synthetic fixed rate loan?
2) What is the annual interest rate that your corporation will pay on its synthetic fixed rate loan?
You become concerned that interest rates will rise substantially and wish to convert the remaining 2-year floating-rate (that is, variable-rate) loan into a 2-year fixed rate loan. You can enter a 2-year swap in which the fixed rate payer pays the fixed rate of 2.60% and the floating-rate payer pays the 6-month SOFR rate. The net payments on the swap will occur semi- annually exactly on the same days that your corporation has to pay interest on its floating-rate loan.
1) How can you convert your corporation's floating-rate loan into a synthetic fixed rate loan?
2) What is the annual interest rate that your corporation will pay on its synthetic fixed rate loan?
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