Subject Business Accounting

Question

Avery Aces has a $1,000,000 face value note payable with an 8% fixed rate and a 3--year term that originates on January 1, 2012 and pays interest only at the end of each quarter (3/31, 6/30, 9/30, and 12/31) until the end of the term, at which point it will pay the last period of interest and the principal (on 12/31/14).
Avery Aces engages in an interest rate swap on January 1, 2012 with Major Medical, which has a $1,000,000 face value note payable that carries interest at a rate of prime +3, when prime is 5%.
The term of the swap is for 3 years.
Interest resets at the beginning of each quarter for the variable rate loan.
Prime is as follows for the first year of the loan:
01.01.2012: 5%
31.03.2012: 4,50%
30.06.2012: 5,5%
30.09.2012: 5,0%
31.12.2012: 4,50%
Required: calculate the swap, and determine the swap asset and liability as of 3/31/2012, 6/30/2012, 9/30/2012, and 12/31/2012 assuming that the interest rates on those dates are expected to persist into the entire future of the loan. (that is, that the swap is valued at net present value of future cash flows, where expected value is equal to present value at present interest rates).
Then, write the journal entries for the first year of the swap.

Solution Preview

This material may consist of step-by-step explanations on how to solve a problem or examples of proper writing, including the use of citations, references, bibliographies, and formatting. This material is made available for the sole purpose of studying and learning - misuse is strictly forbidden.

Interest Rate Swap

This is only a preview of the solution. Please use the purchase button to see the entire solution

Related Homework Solutions

Business Questions
Homework Solution
$70.00
Business
Financial Analyst
MBA
Economy
Accounting
Management
General Motors
Interest
Bonds
Dividends
Stocks
Risk Premiums
Required Returns
US Government
Cash Flow
Pension Fund
Debt
Investments
Portfolio's Beta
Standard Deviation
Accounting Questions
Homework Solution
$28.00
Business
Accounting
Middleham Co.
Balance
Tax
Expense
Cost
loan
Investment
Inventory
Accounting Questions
Homework Solution
$77.00
Accounting
Insurance
Expense
A=L+OE
Houston Company
Doubtful
Account
Treasury
Stock
IBM
Taylor Inc
Accounting Questions
Homework Solution
$50.00
Business
Accounting
Baker
Corporation
Stock
Share
Company
Treasury
Earnings
Journal
Accounting Questions
Homework Solution
$77.00
Accounting
Inventory
Trial
Balance
Retained
Earnings
Count
Dividends
Interest
Income
Statement
Cash
Flow
Get help from a qualified tutor
Live Chats