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A company is planning to issue a 5 year $100 million bond at a fixed rate of 6%.
It is also considering whether or not to enter into a 10 year $100 million swap to receive 5% fixed and pay Libor+ 1% once a year.
The company predicts that Liborwill be4% over the life of the 5 years.
What is the impact of the swap on the company's annual interest costassuming that theLiborpredictioniscorrect?
Suggested Answer: C
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27 comments · newest first
AN
Angella
7 months ago
I feel like it will remain the same. The fixed rate is stable.
RU
Rupert
8 months ago
Actually, it might fall by 2% if Libor stays at 4%.
EL
Ellsworth
8 months ago
I agree, since Libor is lower than the fixed rate.
EL
Eleonora
8 months ago
Definitely an increase in costs with that swap!
AD
Adelina
9 months ago
Wait, how does that even make sense?
LI
Lindsay
9 months ago
I think it will fall by 1%.
CA
Caprice
9 months ago
If Libor is 4%, the swap costs more!
JE
Jenifer
9 months ago
C is the way to go. The swap won't change the annual interest cost.
OT
Otis
9 months ago
D seems like the correct answer. The swap will reduce the annual interest cost by 2%.
PA
Paz
9 months ago
I think the answer is B. The swap will reduce the company's annual interest cost by 1%.
CH
Chantell
10 months ago
If they pay 5% fixed and receive Libor + 1%, it seems like they could end up paying less overall, but I need to double-check my calculations.
LE
Leoma
10 months ago
I practiced a similar question where the swap actually reduced costs, but I can't recall if it was by 1% or 2%. This one seems tricky!
AL
Alica
10 months ago
I think if the company pays Libor + 1%, and Libor is 4%, that would mean they're paying 5% total, which is the same as the fixed rate of the bond.
KA
Kanisha
10 months ago
I think the swap will fall by 1%.
MA
Marylyn
10 months ago
The bond has a fixed rate of 6%.
AD
Adelle
11 months ago
Haha, I bet the CFO is sweating over this one. Gotta love those LIBOR predictions!
SE
Sean
11 months ago
I remember that swaps can change the effective interest rate, but I'm not entirely sure how to calculate the net effect here.
XE
Xenia
11 months ago
Okay, I think I've got it. The bond is at 6%, and the swap is at 5% fixed plus Libor+1%, which with a 4% Libor prediction comes out to 6%. So the swap would result in the interest cost remaining the same, option C.
TR
Tracie
12 months ago
I think the key here is to look at the difference between the bond rate of 6% and the swap rate of 5% plus the Libor prediction of 4%. That would result in a 1% decrease in annual interest cost, so I'm going with option B.
KA
Katina
12 months ago
I'm a bit confused on how the swap would impact the interest cost. If the company is receiving 5% fixed and paying Libor+1%, and Libor is predicted to be 4%, wouldn't that mean the company's interest cost would actually fall by 1%?
RA
Rashad
12 months ago
Okay, let's see. The company is issuing a 5-year bond at 6% fixed, and considering a 10-year swap to receive 5% fixed and pay Libor+1%. If Libor is predicted to be 4%, I think that means the swap would result in a 1% increase in annual interest cost.
CR
Crista
1 year ago
Hmm, this looks like a tricky one. I'll need to carefully work through the details to figure out the impact of the swap.
RU
Ruth
7 months ago
Definitely need to crunch the numbers!
FE
Felicidad
7 months ago
I doubt it will remain the same.
IS
Isaiah
7 months ago
I think it might fall by 1%.
LI
Lindy
10 months ago
This swap could really change things up!
BR
Brinda
11 months ago
But what if Libor goes higher?