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Answers

Chapter 6

Example 1

Spray Co has a $10 million fixed rate borrowing. It has entered an interest rate
swap to swap the interest to a floating rate for a three year period.
The bank has quoted a swap rate of 4.10% for LIBOR, with interest fixing
dates on the start date of each year of the swap agreement.

Spray Co's fixed rate of interest is 4.40%.

LIBOR on the start date of year 2 of the three year swap agreement was
4.25%, but this had risen to 4.58% by the end of year 2 (12 months later).

What is the difference in Spray Co's overall net interest paid in the year
(year 2 of the swap agreement) as a consequence of using the swap?

A $15,000 saving
B $15,000 extra cost

C $18,000 extra cost
D $48,000 extra cost

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