QuestionQuestion

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.

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