Exercise 123 On January 2, 2018, Tylor Company issued a 4-year, $650,000 note at

Question

Exercise 123

On January 2, 2018, Tylor Company issued a 4-year, $650,000 note at 8% fixed interest, interest payable semiannually. Tylor now wants to change the note to a variable rate note. As a result, on January 2, 2018, Tylor Company enters into an interest rate swap where it agrees to receive 8% fixed and pay LIBOR of 5.7% for the first 6 months on $650,000. At each 6-month period, the variable interest rate will be reset. The variable rate is reset to 6.5% on June 30, 2018.

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Exercise 123

On January 2, 2018, Tylor Company issued a 4-year, $650,000 note at 8% fixed interest, interest payable semiannually. Tylor now wants to change the note to a variable rate note. As a result, on January 2, 2018, Tylor Company enters into an interest rate swap where it agrees to receive 8% fixed and pay LIBOR of 5.7% for the first 6 months on $650,000. At each 6-month period, the variable interest rate will be reset. The variable rate is reset to 6.5% on June 30, 2018.

Explanation / Answer

SOLUTION

(A) June 30, 2018 ($) (B) December 31, 2018 ($) Fixed-rate debt 650,000 650,000 Fixed rate (8.00% / 2) 4% 4% Semiannual debt payment 26,000 26,000 Swap fixed receipt 26,000 26,000 Net income effect 0 0 Swap variable rate 5.70% * 1/2 * $650,000 18,525 6.50% * 1/2 * $650,000 21,125 Net interest expense 18,525 21,125

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