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Interest rate (Floating for fixed rate) Swap

Carter Enterprises can issue floating-rate debt at LIBOR +2 percent or fixed-rate debt at 10.00 percent. Brence Manufacturing can issue floating-rate debt at LIBOR +3.1 percent or fixed-rate debt at 11 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 7.95 percent to Brence, and Brence will make a payment of LIBOR to Carter. What are the net payments of Carter and Brence if they engage in the swap? Will Carter be better off to issue fixed rate debt or to issue floating-rate debt and engage in the swap? Will Brence be better off to issue floating-rate debt or to issue fixed-rate debt and engage in the swap?

Textbook answers:

Net to Carter = 9.95% fixed.
Net to Brence = LIBOR + 3.05% floating.

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Solution Preview

Please see the attached file.

Carter Brence
Floating rate: LIBOR + 2.00% Libor+ 3.10%
Fixed rate: 10.00% 11.00%

Carter issues floating, Brence issues fixed, and they swap. In particular, Carter makes a fixed payment of 7.95% to Brence, and Brence makes a payment of LIBOR to ...

Solution Summary

The net payments for a fixed for floating swap are calculated.

$2.19