On March 1, 20X1, Adler Company issued a 5 year, $150,000 note at 7% fixed interest, payable semiannually on August 31st and February 28th.Based on the economic conditions on March 1, 20X3, Adler Company believes the interest rate will decline over the next few years.As a result Adler Company enters into an interest rate swap where it agrees to pay the LIBOR of 6.75% for the first 6 months.At the end of each 6-month period the variable rate will be reset to the current LIBOR.The LIBOR on September 1, 20X3 is 7.75%.
?
Required:
?
a.For August 31, 20X3 and February 28, 20X4, determine the net interest expense.?
?
b.Identify the type of hedge.

Question

Quizplus · Accepted Answer

The Answer of On March 1, 20X1, Adler Company issued a 5 year, $150,000 note at 7% fixed interest, payable semiannually on August 31st and February 28th.Based on the economic conditions on March 1, 20X3, Adler Company believes the interest rate will decline over the next few years.As a result Adler Company enters into an interest rate swap where it agrees to pay the LIBOR of 6.75% for the first 6 months.At the end of each 6-month period the variable rate will be reset to the current LIBOR.The LIBOR on September 1, 20X3 is 7.75%.
?
Required:
?
a.For August 31, 20X3 and February 28, 20X4, determine the net interest expense.?
?
b.Identify the type of hedge.

On March 1, 20X1, Adler Company Issued a 5 Year