You have issued a term loan to a borrower at 4% for 4 years on $25m. They are ecstatic because they (and you) believe interest rates will go up in that 4-year period, but you needed to do the loan because you want the customer’s business. To save your Spread, you decide to buy a $25m notional principal interest rate swap for 4% Fixed to receive SOFR+2%. Assume SOFR for the next 4 years are expected to be 4.25%, 4.75%, 5.5% and 6%, respectively. Required:
Generate a 4-year Cash Flow table detailing what the customer pays, what you will pay in the swap, what you will receive in the swap, and show why you have converted their fixed payments into floating receipts.