How company can use swap to convert the debt to fixed rate

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Reference no: EM132047214

A company has issued floating-rate notes with a maturity of one year, an interest rate of LIBOR plus 125 basis points, and total face value of $50 million. The company now believes that interest rates will rise and wishes to protect itself by entering into an interest rate swap. A dealer provides a quote on a swap in which the company will pay a fixed rate 6.5 percent and receive LIBOR. Interest is paid quarterly, and the current LIBOR is 5 percent. Show all your calculations and explain in details.

(a) Indicate how the company can use a swap to convert the debt to a fixed rate.

(b) Calculate the first payment made by the company. Assume that all payments will be made on the basis of 90/360.

Reference no: EM132047214

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