On January 1, 20X1, Novak, Inc., enters into an interest rate swap and agrees to receive fixed and pay variable on a notional amount of $5,000,000. The contract calls for cash settlement of the net interest amount at December 31 of each year. The yield curve is flat, and the agreement is to last until December 31, 20X9. Both the fixed annual rate and the variable annual rate at January 1, 20X1, are 7.00%. The variable interest rate is reset at the end of each year and becomes effective for the next year. On December 31, 20X1, the variable rate is reset to 8.00% per year, and on December 31, 20X2, the variable rate is reset to 5.00%. 1. Compute the fair value of the swap agreement at December 31, 20X1. Asset or a liability? 2. Compute the fair value of the swap agreement at December 31, 20X2. Asset or a liability?

On January 1, 20X1, Novak, Inc., enters into an interest rate swap and agrees to receive fixed and pay variable on a notional amount of $5,000,000. The contract calls for cash settlement of the net interest amount at December 31 of each year. The yield curve is flat, and the agreement is to last until December 31, 20X9. Both the fixed annual rate and the variable annual rate at January 1, 20X1, are 7.00%. The variable interest rate is reset at the end of each year and becomes effective for the next year. On December 31, 20X1, the variable rate is reset to 8.00% per year, and on December 31, 20X2, the variable rate is reset to 5.00%. 1. Compute the fair value of the swap agreement at December 31, 20X1. Asset or a liability? 2. Compute the fair value of the swap agreement at December 31, 20X2. Asset or a liability?

Financial Accounting Intro Concepts Meth/Uses

14th Edition

ISBN:9781285595047

Author:Weil

Publisher:Weil

ChapterA: Appendix - Time Value Of Cash Flows: Compound Interest Concepts And Applications

Section: Chapter Questions

Problem 27E

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On January 1, 20X1, Novak, Inc., enters into an interest rate swap and agrees to receive fixed and pay variable on a notional amount of $5,000,000. The contract calls for cash settlement of the net interest amount at December 31 of each year. The yield curve is flat, and the agreement is to last until December 31, 20X9. Both the fixed annual rate and the variable annual rate at January 1, 20X1, are 7.00%. The variable interest rate is reset at the end of each year and becomes effective for the next year. On December 31, 20X1, the variable rate is reset to 8.00% per year, and on December 31, 20X2, the variable rate is reset to 5.00%. Required: Compute the fair value of the swap agreement at December 31, 20X1. Be sure to indicate whether it is an asset or a liability. Compute the fair value of the swap agreement at December 31, 20X2. Be sure to indicate whether it is an asset or a liability.
On January 1, 20x1, ABC Co. obtained a five-year, ₱1,000,000 variable-rate loan with interest payments due at each year-end and the principal due on December 31, 20x5. As protection from possible fluctuations in current market rates, ABC Co. enters into an interest rate swap for the whole principal of the loan. Under the agreement, ABC Co. shall receive variable interest and pay fixed interest based on a fixed rate of 8%. Swap payments shall be made at each year-end. The following are the current market rates: Jan. 1, 20x1 8% Jan. 1, 20x2 9% Jan. 1, 20x3 12% 16. How much is the fair value of the interest rate swap on December 31, 20x1? (Indicate whether it is a derivative asset or liability.) a. 32,397 asset b. 32,397 liability c. 46,884 asset d. 53,223 liability
On January 2, 2020, Parton Company issues a 5-year, $10,000,000 note at LIBOR, with interest paid annually. The variable rate is reset at the end of each year. The LIBOR rate for the first year is 5.8%. Parton Company decides it prefers fixed-rate financing and wants to lock in a rate of 6%. As a result, Parton enters into an interest rate swap to pay 6% fixed and receive LIBOR based on $10 million. The variable rate is reset to 6.6% on January 2, 2021. Instructions a. Compute the net interest expense to be reported for this note and related swap transactions as of December 31, 2020. b. Compute the net interest expense to be reported for this note and related swap transactions as of December 31, 2021.
nsurance company, IHI, is part of a swap agreement with investment bank Lachlin Bank on a notional principal of $100 million. IHI has agreed to pay Lachlin Bank the six month BBSW rate and receives 7% pa, convertible half-yearly. If the swap has a residual life of 18 months, and the next interest payment is due in six months, calculate the value of the swap for Lachlin, given BBSW rates (compounding continuously) for the corresponding 6, 12 and 18 month maturities are 6.91% pa, 7.3% pa, 7.35% pa and the half year BBSW rate on the next payment is known to be 7% pa compounding half-yearly. Give your answer in millions of dollars to 2 decimal places. Value = $ ___________ million ANSWER IN TYPING OTHER WISE DOWNVOTE YOU
Use the following information for the next two questions:On January 1, 20x1, ABC Co. obtained a five-year, ₱1,000,000 variable-rate loan with interest paymentsdue at each year-end and the principal due on December 31, 20x5.As protection from possible fluctuations in current market rates, ABC Co. enters into an interest rateswap for the whole principal of the loan. Under the agreement, ABC Co. shall receive variable interestand pay fixed interest based on a fixed rate of 8%. Swap payments shall be made at each year-end.The following are the current market rates: Jan. 1, 20x1 8% Jan. 1, 20x2 9% Jan. 1, 20x3 12% 62. How much is the fair value of the interest rate swap on December 31, 20x1? (Indicate whether it is aderivative asset or liability.)a. 32,397 assetb. 32,397 liabilityc. 46,884 assetd. 53,223 liability63. How much is the fair value of the interest rate swap on December 31, 20x2? (Indicate whether it is aderivative asset or liability.)a. 83,294 assetb. 83,294…
Tuba Co. enters into a “receive variable, pay fixed” interest swap on January 1, 20x1 for a notional amount of ₱1,000,000. Under the terms of the contract, if the current rate increases above 12% (i.e., the set rate), Tuba Co. shall receive the excess interest. If the current rate falls below 12%, Tuba Co. shall pay the deficiency. Swap payment shall be made on December 31, 20x2. The current rates are as follows: Jan. 1, 20x1……………………………12% Jan. 1, 20x2……………………………15% How much is the net cash settlement on December 31, 20x2? 30,0000 payment 30,000 receipt 26,087 payment 26,087 receipt
Incredible Inc., a manufacturer of children’s toys, enters into a two-year plain vanilla interest rate swap, in which the corporation will receive a fixed rate and pay a floating rate of LIBOR. The notional amount on this swap is $75 million. Swap payments will be netted every 180 days, and the LIBOR requires the assumption of a 360-day year. The term structure of LIBOR on the swap initiation date is as follows: Days Rate (%) 180 3.50 360 3.55 540 3.60 720 3.70 a. What is the fixed rate determined on the swap initiation date? b. Calculate the swap value on the initiation date.
Chango Industries has decided to borrow $50,000,000.00 for six months. To reduce the company’s interest rateexposure, Chango entered into a swap whereby the dealer pays quoted fixed rate of 5.91% in exchange for receiving3-month LIBOR at settlement date. Assuming that 3-month LIBOR is 5.6% on the rate determination day, describethe transaction that occurs between the dealer and Chango.a. The dealer is obligated to pay Chango $38,750.b. The dealer is obligated to pay Chango $31,250.c. Chango is obligated to pay the dealer $38,750.d. Chango is obligated to pay the dealer $31,250.
A firm enters into a five-year fixed for float agreement one year ago. Because one year has passed the swap has exactly four more years remaining. Since the reset date for the next floating payment is today, the next applicable floating rate can be identified in the table below. Payments from each firm occur at the end of each year. Assume that the firm agreed to pay a fixed rate of 6.45% (based on annual compounding) and to receive the floating rate. The notional amount of the swap is $12 million. Use the following current spot term structure for annual interest rates (all based on continuous compounding) to determine the value of the plain vanilla, fixed for float interest rate swap. Term (years) Spot Zero Annual Interest Rates (based on continuous compounding) 0.5 5% 1 5.5% 1.5 6% 2 6.5% 2.5 7% 3 8% 3.5 8.5% 4 9% 4.5 9.5% 5 10%
mazon corporation and Microsoft corporation agree to enter an interest swap agreement with a nominal value of $1,000,000. The two companies enter into two-year interest rate swap contract with the specified nominal value of $1,000,000. Amazon corporation offers Microsoft corporation a fixed rate of 5% in exchange for receiving a floating rate of the LIBOR rate plus 1%. The current LIBOR rate at the beginning of the interest rate swap agreement is 4%. a) If LIBOR rate increases to 5.25% by the end of the first year what are the payment due between both companies? Assume interest payment will be made annually and the floating rate for Microsoft corporation will be calculated using the prevailing LIBOR rate at the time that interest payments are due. b) Critically evaluate interest rate swap agreements focusing on their significance and advantages in financial management.
Amazon corporation and Microsoft corporation agree to enter an interest swap agreement with a nominal value of $1,000,000. The two companies enter into two-year interest rate swap contract with the specified nominal value of $1,000,000. Amazon corporation offers Microsoft corporation a fixed rate of 5% in exchange for receiving a floating rate of the LIBOR rate plus 1%. The current LIBOR rate at the beginning of the interest rate swap agreement is 4%. a) If LIBOR rate increases to 5.25% by the end of the first year what are the payment due between both companies? Assume interest payment will be made annually and the floating rate for Microsoft corporation will be calculated using the prevailing LIBOR rate at the time that interest payments are due. b) Critically evaluate interest rate swap agreements focusing on their significance and advantages in financial management.
Suppose you have a 2.5-year remaining on an interest rate swap with a notionalprincipal of $10, 000, 000 between Company A and Company B. Company A pays fixed rateand Company B pays the float rate. Fixed and float payments are exchanged every year andthe last payment was exchanged 6 months ago. The fixed rate is 3.5% per annum, and thefloating rate is tied to the annual LIBOR. The previous 1-year LIBOR rate, set 6 months ago,is 2.75%, 6 month LIBOR is 3.25%. the 1.5-year LIBOR is 3.25%, and the 2.5-year LIBOR is3.50%.Calculate the present value of the fixed and floating legs of the swap, and determine the swap’snet present value from Company A’s perspective. Assume annual compounding for discounting.