Question
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.