On January 2, 2015, Golf Corp. issued a 4-year, $100,000 note at 6% fixed intere
ID: 2475239 • Letter: O
Question
On January 2, 2015, Golf Corp. issued a 4-year, $100,000 note at 6%
fixed interest, interest payable semiannually. Golf now wants to
change the note to a variable-rate note.
As a result, on January 2, 2015, Golf Corp. enters into an interest
rate swap where it agrees to receive 6% fixed and pay LIBOR of 5.7%
for the first 6 months on $100,000. At each 6-month period, the
variable rate will be reset. The variable rate is reset to 6.7% on
June 30, 2015.
(a) Compute the net interest expense to be reported for this note and
related swap transaction as of June 30, 2015.
(b) Compute the net interest expense to be reported for this note and
related swap transaction as of December 31, 2015.
Explanation / Answer
(a) Compute the net interest expense to be reported for this note and related swap transaction as of June 30, 2015.
Interest rate after swap = Fixed Interest rate Payment - Fixed interest recieved + 6 month Libor rate
Interest rate after swap = 6% -6% + Libor Rate
Interest rate after swap = Libor rate
Net interest expense = Interest rate after swap * Notes Payable
Net interest expense = 5.7%*1/2 * 100000
Net interest expense = 2850
(b) Compute the net interest expense to be reported for this note and related swap transaction as of December 31, 2015.
Net interest expense = Interest rate after swap * Notes Payable
Net interest expense = 6.7%*1/2 * 100000
Net interest expense = 3350
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