Question

On January 1, 2019 Panther Company received a two-year $600,000 loan. The loan calls for payments...

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

Homework Answers

Answer #1

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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