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

A.If engaged in aswap the net payments would be

B. Carter would be better off to issue to issue floating-rate debt and engage in the swap.

C. Brence be better off to issue fixed-rate debt and engage in the swap.

Carter Enterprise Payment to Lendor LIBOR Payment to swap counterparty 8.90% Payments from swap counterparty -LIBOR 1.00% Net payment Fixed 7.90% Fixed Brench Manufacturing Payment to Lendor 10.5% Payment to swap counterparty -8.90% Payments from swap counterparty LIBOR 1.00% Net payment LIBOR + 2.60% Floating

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