Vesta Ventures wishes to borrow $10 million for one year. A bank offers an interest-only...
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- Vesta Ventures wishes to borrow $10 million for one year. A bank offers an interest-only loan with quarterly interest payments at a floating rate of 90-day Libor plus 90 bps and full principal repayment due at the end of the one-year term of the loan. Vesta also enters a one-year, quarterly payment interest rate swap as the fixed rate payer to hedge interest rate risk. The swap has a notional principal of $10 million, the floating rate is Libor, and the fixed rate is 3.15%. The loan and the swap utilize a 30/360 day count convention.
Assuming 90-day Libor evolves as given below, what is Vestas projected loan interest payment, net swap payment, and overall net interest payment on the hedged loan each quarter? (3 points)
| Quarter | Libor |
| 0 | 2.90% |
| 1 | 3.10% |
| 2 | 3.25% |
| 3 | 3.50% |
| 4 | 3.60% |
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