Question

Heather O'Reilly, the treasurer of CB Solutions, believes interest rates are going to fall, so she...

Heather O'Reilly, the treasurer of CB Solutions, believes interest rates are going to fall, so she wants to swap her future fixed rate interest payments for floating rates. At present she is paying fixed payments of 7.00% per annum on $5,000,000 of debt for the next two years, with payments due semiannually. Ms. O'Reilly has just made an interest payment today, so the next payment is due six months from today. LIBOR is currently 4.00% per annum. If LIBOR falls at the rate of 25 basis points per annum period, starting tomorrow, how much does Ms. O'Reilly save or cost her company by making this swap?    

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Answer #1
Interest rate Interest amount Interest amount
Year-1 Year-2
Fixed rate 7.00% 5000000*7% $     350,000
7.00% 5000000*7% $     350,000
Total interest $     700,000
Floating rate 4.00% 5000000*4% $     200,000
3.75% 5000000*3.75% $     187,500
Total interest $     387,500
Saving in interest 700000-387500
Saving in interest $     312,500
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