How much will widget gain or lose from this swap deal

Reference no: EM132199543

Question - Widget Co. has just issued $1 million in five-year bonds with a variable annual interest rate defined as the London Interbank Offered Rate (LIBOR) plus 1.5% (or 150 basis points). LIBOR is at 1%, low for its historical range, so Widget management is anxious about an interest rate rise. They find a bank., that is willing to pay Widget an annual rate of LIBOR plus 1.5% on a notional principal of $1 million for 5 years. In exchange, Widget pays the bank a fixed annual rate of 4% on a notional value of $1 million for five years.

(a) If LIBOR only rises 0.5% per year, how much will Widget gain or lose from this swap deal? (Let's temporarily ignore the effect of discounting).

(b) If LIBOR only rises 1% per year, how much will Widget gain or lose from this swap deal? (Let's temporarily ignore the effect of discounting).

Reference no: EM132199543

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