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%
Mortgages
A mortgage is a formal agreement in which a bank or other financial institution lends cash at interest in return for assuming the title to the debtor's property, on the condition that the obligation is paid in full.
Mortgage
The term "mortgage" is a type of loan that a borrower takes to maintain his house or any form of assets and he agrees to return the amount in a particular period of time to the lender usually in a series of regular equally monthly, quarterly, or half-yearly payments.
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 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% |
62. 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
63. How much is the fair value of the interest rate swap on December 31, 20x2? (Indicate whether it is a
derivative asset or liability.)
a. 83,294 asset
b. 83,294 liability
c. 96,073 asset
d. 102,932 liability
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