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

 Heather​ O'Reilly, the treasurer of CB​ Solutions, believes interest rates are going to​ rise, so she wants to swap her future​ floating-rate interest payments for fixed rates.​ Presently, she is paying LIBORplus2.00​% per annum on $ 5 comma 100 comma 000 of debt for the next two​ years, with payments due semiannually. LIBOR is currently 3.97​% per annum. Heather has just made an interest payment​ today, so the next payment is due six months from now. Heather finds that she can swap her current​ floating-rate payments for fixed payments of 7.007​% per annum. ​ (CB Solutions' weighted average cost of capital is 12​%, which Heather calculates to be 6​% per​ 6-month period, compounded​ semiannually).

a. If LIBOR rises at the rate of 50 basis points per​ 6-month period, starting​ tomorrow, how much does Heather save or cost her company by making this​ swap?

b. If LIBOR falls at the rate of 25 basis points per​ 6-month period, starting​ tomorrow, how much does Heather save or cost her company by making this​ swap?

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Answer #1

a). Total cost if swap is made = 178,700

b). Total cost if swap is made = 366,200

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