Exercise 123 On January 2 2018 Tylor Company issued a 4year

Exercise 123

On January 2, 2018, Tylor Company issued a 4-year, $650,000 note at 8% fixed interest, interest payable semiannually. Tylor now wants to change the note to a variable rate note. As a result, on January 2, 2018, Tylor Company enters into an interest rate swap where it agrees to receive 8% fixed and pay LIBOR of 5.7% for the first 6 months on $650,000. At each 6-month period, the variable interest rate will be reset. The variable rate is reset to 6.5% on June 30, 2018.

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Exercise 123

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SOLUTION

	(A) June 30, 2018 ($)	(B) December 31, 2018 ($)
Fixed-rate debt	650,000	650,000
Fixed rate (8.00% / 2)	4%	4%
Semiannual debt payment	26,000	26,000
Swap fixed receipt	26,000	26,000
Net income effect	0	0
Swap variable rate
5.70% * 1/2 * $650,000	18,525
6.50% * 1/2 * $650,000		21,125
Net interest expense	18,525	21,125

Exercise 123 On January 2, 2018, Tylor Company issued a 4-year, $650,000 note at 8% fixed interest, interest payable semiannually. Tylor now wants to change the

Exercise 123 On January 2 2018 Tylor Company issued a 4year

Solution

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