6. Carter Enterprises can issue floating-rate debt at LIBOR or fixed-rate debt a

Question

6. Carter Enterprises can issue floating-rate debt at LIBOR or fixed-rate debt at 9.9 percent. Brence Manufacturing can issue floating-rate debt at LIBOR + 1.5 percent or fixed-rate debt at 10.5 percent. Suppose Carter issues floating-rate debt and Brence issues fixed-rate debt. They are considering a swap in which Carter will make a fixed-rate payment of 8.90 percent to Brence, and Brence will make a payment of LIBOR + 1 to Carter. a. What are the net payments of Carter and Brence if they engage in the swap?

b. Will Carter be better off to issue fixed-rate debt or to issue floating-rate debt and engage in the swap?

c. Will Brence be better off to issue floating-rate debt or to issue fixed-rate debt and engage in the swap?

Explanation / Answer

Answer:a If engaged in a swap, the net payments would be:

Answer:b carter would be better off if they issued floating-rate debt and engaged in a swap.

Answer:c Brence would be better off it if issued fixed-rate debt and engaged in a swap.

Carter Enterprises Payment to lender LIBOR 1% Payment to Swap counterparty 8.90% Payment from swap counterparty -LIBOR Net payment 9.90 % Fixed

Related Questions

Navigate

• Browse (All)
• Browse 6
• Subjects

---

---

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