Practice

Question 1

1. You are the corporate treasurer for Aloha Surf Products, a local company that focuses on manufacturing surfboards, windsurfers and small sail boats. Your main source of financing came from a $5 million bank loan that has a floating 3-month LIBOR plus 2% interest rate and a remaining term (maturity) of 5 years. Recently you have become concerned that interest rates may raise significantly in the near future and thus increase the interest cost on your floating rate bank loan. using the Swap Curve information on the right, what would be your interest cost after completing an interest rate swap to hedge your position against rising interest rates?

Answer 1

Suf will pay bank: LIBOR + 2% interest. and courter Party will pay suf LIBOR. Suf will pay CP fixed 3%. (sine 5 years maturity is 3%. it is from the Swap Cure chart)
Answer: c: 5.00% fixed