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Question: Leeson Company entered into an interest rate swap with Morley Corporation on January 1, 2003. The- notional amount of the swap is $20,000;000. Leeson will pay Morley a fixed annual rate of 8 percent. Morley will pay Leeson LIBOR plus 1 percent. Settlement is to be made every six months and the contract lasts for three years. The annual variable rates based on LIBOR plus 1 percent are:

July 1, 2003 8.26%

January 1, 2004 8.32%

July 1, 2004 8.18%

January 1, 2005 7.92%

July 1, 2005 7.90%

January 1, 2006 8.06%

Required: a. Set up a schedule showing the net receipts or payments for Leeson.

b. Why would Leeson enter into a strategy of this type?

c. Has Leeson benefited from this transaction?

d. What dangers are present?

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Accounting Basics, Accounting

Category:- Accounting Basics
Reference No.:- M92338246

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