Problem:
Janutis Co. has just issued fixed rate debt at 10 percent. Yet, it prefers to convert its financing to incur a floating rate on its debt. It engages in an interest rate swap in which it swaps variable rate payments of LIBOR plus 1 percent in exchange for payments of 10 percent. The interest rates are applied to an amount that represents the principal from its recent debt issue in order to determine the interest payments due at the end of each year for the next three years. Jauntis Co. expects that the LIBOR will be 9 percent at te end of the first year, 8.5 percent at the end of the second year, and 7 percent at the end of the third year. Determine the financing rate that Janutis Co. expects to pay on its debt after considering the effect of the interest rate swap.
LIBOR = London Interbank Offer Rate