On January 2, 2014, MacCloud Co. issued a 4-year, $100,000 note at 6% fixed inte

Question

On January 2, 2014, MacCloud Co. issued a 4-year, $100,000 note at 6% fixed interest, interest payable semiannually. MacCloud now wants to change the note to a variable-rate note.
As a result, on January 2, 2014, MacCloud Co. 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, 2014.
Instructions
(a) Compute the net interest expense to be reported for this note and related swap transaction as of June 30, 2014.
(b) Compute the net interest expense to be reported for this note and related swap transaction as of December 31, 2014.

Explanation / Answer

Answer : a) 2850 b)3350

Solution :

(A) 30/6/2014 (B) 31/12/2014 Fixed rate debt $100000 $100000 Fixed rate(6%÷2) 3% 3% Semiannual debt payment 3000 3000 Swap fixed receipt 3000 3000 Net income effect 0 0 Swap variable rate 5.70% × 1/2 × $100000 $2850 0 6.70% × 1/2 × $100000 0 $3350 Net interest expense $2850 $3350

Related Questions

Navigate

• Browse (All)
• Browse O
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.