Raj Patel, the treasurer of SDM Associates, believes interest rates are going to rise, so he wants to swap his future floating rate interest payments for fixed rates. At present he is paying LIBOR + 1.5% per annum on U.S. Dollar ($) 5,000,000 of debt for the next two years, with payments due semi-annually. LIBOR is currently 1.50% per annum. Raj has just made an interest payment today, so the next payment is due six months from today. Raj finds that he can swap his current floating rate payments for fixed payments of 5.50% per annum (vs. receiving LIBOR payments from the swap bank). SDM Associates’ cost of capital is 9.5%, which Raj calculates to be 4.25% per six month period, compounded semi-annually. Note: Assume there are 360 days in a year. LIBOR is the London Interbank Offered Rate. (i) If LIBOR rises at the rate of 50 basis points per six month period, starting tomorrow, how much would Raj save or cost his company by making this swap? (ii) If LIBOR falls at the rate of 25 basis points per six month period, starting tomorrow, how much would Raj save or cost his company by making this swap?
Raj Patel, the treasurer of SDM Associates, believes interest rates are going to rise, so he wants to swap his future floating rate interest payments for fixed rates. At present he is paying LIBOR + 1.5% per annum on U.S. Dollar ($) 5,000,000 of debt for the next two years, with payments due semi-annually. LIBOR is currently 1.50% per annum.
Raj has just made an interest payment today, so the next payment is due six months from today. Raj finds that he can swap his current floating rate payments for fixed payments of 5.50% per annum (vs. receiving LIBOR payments from the swap bank). SDM Associates’ cost of capital is 9.5%, which Raj calculates to be 4.25% per six month period, compounded semi-annually. Note: Assume there are 360 days in a year. LIBOR is the London Interbank Offered Rate.
(i) If LIBOR rises at the rate of 50 basis points per six month period, starting tomorrow, how much would Raj save or cost his company by making this swap?
(ii) If LIBOR falls at the rate of 25 basis points per six month period, starting tomorrow, how much would Raj save or cost his company by making this swap?
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