On $10 million of loans, Firm A is paying a fixed $700,000 in interest payments while Firm B is paying LIBOR plus 50 basis points. The current LIBOR rate is 6.25 percent. Firms A and B have agreed to swap interest payments. How much will be paid to which firm this year?

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Firm A is currently paying $700,000 in fixed interest, while Firm B is paying LIBOR plus 50 basis points, or 6.75 percent (6.25 percent + 0.50 percent). The interest payment due from Firm A to Firm B would be $10,000,000 x 6.75% = $675,000. The interest payment due from Firm B to Firm A would be $10,000,000 x 7.00% = $700,000. Thus, Firm B would pay $25,000 ($700,000 - $675,000) to Firm A.

On $10 Million of Loans, Firm a Is Paying a Fixed