On January 1, 2021, a company issued $5,000,000 in variable rate debt at the prime rate + 60 bp with interest payments due every six months. The variable rate is adjusted every six months. The prime rate is 1.7% on January 1, so the variable debt has an interest rate of 2.3% for the first six months of 2021. On January 1, the company enters into an interest rate swap in which it receives the variable rate and pays a fixed rate of 3% on the notional amount of $1,000,000 for the life of the debt. On June 30, 2021, the prime rate is 1.2% and the market value of the swap declines by $10,000.
Required
a. How much in interest expense will the company record for the first six months of 2021, after considering the effects of the swap?
b. Is the swap a cash flow hedge or a fair value hedge? Explain.
c. Where is the change in value of the swap reported?

Question

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The Answer of On January 1, 2021, a company issued $5,000,000 in variable rate debt at the prime rate + 60 bp with interest payments due every six months. The variable rate is adjusted every six months. The prime rate is 1.7% on January 1, so the variable debt has an interest rate of 2.3% for the first six months of 2021. On January 1, the company enters into an interest rate swap in which it receives the variable rate and pays a fixed rate of 3% on the notional amount of $1,000,000 for the life of the debt. On June 30, 2021, the prime rate is 1.2% and the market value of the swap declines by $10,000.
Required
a. How much in interest expense will the company record for the first six months of 2021, after considering the effects of the swap?
b. Is the swap a cash flow hedge or a fair value hedge? Explain.
c. Where is the change in value of the swap reported?

On January 1, 2021, a Company Issued $5,000,000 in Variable