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Fearing that market interest rate will uctuate, Bethlehem with credit rating of Baa decides to engage in an interest rate swaps for their 100 million...

Fearing that market interest rate will fluctuate, Bethlehem with credit rating of Baa decides to engage in an interest rate swaps for

their 100 million variable debt with US steel in January 1, 2017. US steel, with credit rating of A33, has long term fixed debt of $100

million at the time of transaction. According to the swaps contract, Bethlehem will pay 8 percent interest rate to US steel and, in

turn US steel pays T-bill minus 0.25% to Bethlehem steel. At the time of swap transaction bond market quotes the following interest rates for these tow credit ratings on annual basis. Baa Aaa

Fixed 9% 7.5%

Variable T+ 0.25% T 1. Which company is exposed to the market interest rate fluctuation after this transaction? Why?

2. How much do Bethlehem and US steel save interest expenses for 2017 with interest rate swaps contract? Please show your computations.

3. Discuss the impact of this derivative on a. Balance sheet: b. Income statements:

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