interest rate risk

interest rate risk

IBM has an existing loan of $20 million at LIBOR +0.25%, repriced every six months, for the next five years. The firm worries that the interest rates, particularly LIBOR, might go up in the years ahead. It decides to swap the loan into a fixed rate one. It contacts Citibank and receives the following quotes:

Bid        Offer
6.47%        6.51%

for a five-year interest rate swap. The quotes are against six-month LIBOR. (When the bank pays LIBOR, it receives the offer rate; when the bank receives LIBOR, it pays the bid rate)

(1)    Please help IBM make an arrangement with Citibank.

(2)  Please evaluate the result for IBM after the swap.

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