if libor rates declined by 0 1 each period from the january 1 20×4 reset rate of 7 w 615294

Assessing the effectiveness of a fixed for variable interest rate swap. Tesker International has loaned $20,000,000 to a foreign company that Tesker has a 20% equity interest in. Interest, paid June 30 and December 31, and principal on the loan is to be paid in U.S. dollars. The loan matures on December 31, 20X5, and has a fixed interest rate of 8%. Tesker anticipates that variable interest rates will be increasing in the near term and is therefore considering an interest rate swap.

Tesker’s bank has agreed to swap a variable rate, based on LIBOR, plus 1% in exchange for receipt of a fixed rate through the maturity date of the foreign loan. The swap will cover a notional amount of $10,000,000. Reset dates will be January 1 and July 1, with net settlement occurring at the same time. Assumed rates and values are as follows:

1. Tesker’s management is uncertain as to whether or not they should engage in a swap. In order to assist them in their decision, complete the following schedule for all interest periods based on the assumed rates and values.

2. Summarize the effect on Tesker’s income with and without the interest rate swap.

3. If LIBOR rates declined by 0.1% each period from the January 1, 20X4 reset rate of 7%, what would be the overall effect on earnings of this scenario?