Leeson Company entered into an interest rate swap with Morley Corporation on January 1, 2003. The notional amount of the swap is $20,000,000. Leeson will pay Morley a fixed annual rate of 8 percent. Morley will pay Leeson LIBOR plus 1 percent. Settlement is to be made every six months and the contract lasts for three years. The annual variable rates based on LIBOR plus 1 percent are:
|
July 1, 2003
|
8.26%
|
|
January 1, 2004
|
8.32%
|
|
July 1, 2004
|
8.18%
|
|
January 1, 2005
|
7.92%
|
|
July 1, 2005
|
7.90%
|
|
January 1, 2006
|
8.06%
|
Required:
a. Set up a schedule showing the net receipts or payments for Leeson.
b. Why would Leeson enter into a strategy of this type?
c. Has Leeson benefited from this transaction?
What dangers are present?