Regional bank to secure loan to finance expansion

Assignment Help Financial Management

Reference no: EM131615844

A construction company goes to a regional bank to secure a $25 million loan to finance expansion. The bank agrees to make the quarterly loan, with a loan interest rate equal to 3-month LIBOR + 300 basis points. The company then contacts a swaps dealer and enters into an interest rate swap, agreeing to pay a fixed rate of 4.0% in exchange for receiving a floating rate of 3-month LIBOR + 300 bps. The notional principal of the swap is $25 million, and the quarterly swap’s interest payment dates are aligned with the loan’s interest payment dates. All swap payments are made quarterly and on the basis of 30 days per month and 360 days per year. At inception, 3-month LIBOR is 0.75%.

• Three months after swap inception, on the first quarterly settlement date, 3-month LIBOR is 1.20%.

• Six months after swap inception, on the second quarterly settlement date, 3-month LIBOR was 0.90%.

1. Which of the following will most likely take place on the first swap settlement date?

To settle the swap (to the nearest dollar), the construction company:

a) pays the dealer $12,500.

b) pays the dealer $15,625.

c) receives $12,500 from the dealer.

d) receives $15,625 from the dealer.

2. Which of the following will most likely take place on the second swap settlement date? To settle the swap (to the nearest dollar), the construction company:

a) pays the dealer $6,250.

b) pays the dealer $12,500.

c) receives $6,250 from the dealer.

d) receives $12,500 from the dealer.

Reference no: EM131615844

Questions Cloud

What is price per share of the company stock : You have looked at the current financial statements for Reigle Homes, Co. What is the price per share of the company's stock?

House on property which will significantly increase value : Carl leases 2 acres of land to his friend, Larry. Larry intends to build a house on the property which will significantly increase its value.

Considering purchase of new equipment for three year project : PECO is considering the purchase of new equipment for a 3-year project.

Calculate the npv and irr with mitigation : Capital budgeting criteria: Calculate the NPV and IRR with mitigation. Calculate the NPV and IRR without mitigation.

Regional bank to secure loan to finance expansion : A construction company goes to a regional bank to secure a $25 million loan to finance expansion.

What are company capital structure weights on market value : What are the company's capital structure weights on a book value basis? What are the company’s capital structure weights on a market value basis?

Evaluate the investment from an investors perspective : You are advising an investor on whether to buy a beach house as an investment property. Evaluate the investment from an investors perspective.

What is the incremental savings of buying the valves : Howell Corporation produces an executive jet for which it currently manufactures a fuel valve; What is the incremental savings of buying the valves?

What is the pretax cost of debt and aftertax cost of debt : Jiminy’s Cricket Farm issued a 30-year, 8 percent semiannual bond 3 years ago. What is the pretax cost of debt? What is the aftertax cost of debt?

User Account

All Pages