Problem 23.14 Desert Trading Company has issued $100 million worth of long-term

Question

Problem 23.14

Desert Trading Company has issued $100 million worth of long-term bonds at a fixed rate of 17%. The firm then enters into an interest rate swap where it pays LIBOR and receives a fixed 12% on notional principal of $100 million. What is the firm

Desert Trading Company has issued $100 million worth of long-term bonds at a fixed rate of 17%. The firm then enters into an interest rate swap where it pays LIBOR and receives a fixed 12% on notional principal of $100 million. What is the firm

Explanation / Answer

The firms overall cost = $100 million x (17% - 12%)

The firms overall cost = $100 million x 5% = $5 million

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