On January 1, 2019 Panther Company received a two-year $600,000
loan. The loan calls for payments to be made at the end of each
year based on the prevailing market rate at January 1 of each year.
The interest rate at January 1, 2019 was 10 percent. Panther
company does not want to bear the risk that interest rates may
increase in year two of the loan. Aegan company believes that rates
ma decrease and they would prefer to have ha varible debt. So the
two companies enter into an interest rate swap agreement whereby
Aegan agrees to make panther interest payment in 2020 and panther
likewise agree to make Aegans interest payment in 2020. The two
companies agree to make settlement payments for the difference only
on December 31 2020. If the interest rate on Jan 1 2019 is 9
percent what will be panther settlement payment to/from Aegan on
December 31, 2020. r
percent.
A 6,000 receipt
B 6,000 payment
C12,000 payment
D12,000 receipt
C. $ 12,000 Payment
Loan Amount = $ 6,00,000
Period of loan (January 1,2019 to Deceember 31,2020) = 2 years
Interest for 2 years = $ 6,00,000 * 10% * 2 = $ 1,20,000
Interest swap agreement was entered in order to safeguard against increase in interest rate. But actual interest rate turns out to be 9 %. i.e., Decreased. Therefore Panther company need to bear the loss.
Interest for 2 years at the rate of 9% = $ 6,00,000* 9% * 2 = $ 1,08,000
Net payment to be made = $ 1,20,000 - $ 1,08,000
= $ 12,000
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