The Ebersole Software Development Company has a $25 million, 8% fixedrate bond obligation maturing in one year. The company plans to finance the

$25 million principal liability by issuing new five-year fixed-rate bonds. Currently, five-year T-notes are trading to yield 6% and Ebersole’s bonds are trading at 200 basis points above the Treasury yields. Ebersole is worried that interest rates could increase in one year and would like to establish a cap on the rate it would pay on its future five-year bond issue. Ebersole is considering purchasing a one-year payer swaption on a five-year 8%/LIBOR generic swap with notional principal of $25 million from First South Bank for $250,000. Show in a table

(1) the values and profits/losses at expiration that Ebersole would obtain from closing the swaption, and (2) the hedged rate (based on $25 million debt) they would pay from issuing five-year bonds to raise $25 million minus the proceeds from selling the swaption (do not include $250,000 cost). Determine the values, profits, and rates at fixed rates on five-year par value swap at expiration of 6%, 6.5%, 7%, 7.5%, 8%, 8.5%, 9%, 9.5%, and 10%. Assume the rate on the par value swaps and Ebersole’s five-year bond rate are the same and that the yield curve is flat.