LIBOR Mini-Case:
- Capri Enterprises can issue floating rate debt at LIBOR +2.00% or fixed rate debt at 10.00%.
- Bari Manufacturing can issue floating rate debt at LIBOR +3.10% or fixed rate debt at 11.00%.
- Capri Enterprises wants fixed rate financing and Bari Manufacturing wants floating rate financing.
- Each party is considering an interest rate swap in which Capri will make a fixed rate payment of 7.95% to Bari, and Bari will make a payment of LIBOR to Capri.
Please prepare a separate response for each of the following questions (show work):
1) What are the net payments of Capri and Bari if they engage in the interest rate swap?
2) Will Capri be better off to issue fixed rate debt and not engage in the swap or issue floating rate debt and engage in the interest rate swap? Please quantify savings.
3) Will Bari be better off to issue floating rate debt and not engage in the swap or issue fixed rate debt and engage in the swap? Please quantify savings.