On January 2, 2014, Parton Company issues a 5-year, $11,146,000 note at LIBOR, w

Question

On January 2, 2014, Parton Company issues a 5-year, $11,146,000 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 6.8%. Parton Company decides it prefers fixed-rate financing and wants to lock in a rate of 7%. As a result, Parton enters into an interest rate swap to pay 7% fixed and receive LIBOR based on $11,146,000. The variable rate is reset to 7.6% on January 2, 2015.

a. Compute the net interest expense to be reported for this note and related swap transactions as of December 31, 2014

b. Compute the net interest expense to be reported for this note and related swap transactions as of December 31, 2015.

Explanation / Answer

Year 1 Year 2 Pay existing interest at LIBOR to investors -757928 -847096 Receive LIBOR from swap party 757928 847096 Pay swap party @ 7% -780220 -780220 Net Interest flow -780220 -780220 Savings         (22,292.00)          66,876.00

Related Questions

Navigate

• Browse (All)
• Browse O
• Subjects

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