| Course | GF584 Treasury Management II |
|---|---|
| Unit | Unit 7 |
| Paper type | Interest rate swap memo |
| Length | About 830 words, 6 pages double-spaced |
| Format | APA 7 student paper |
| School | Purdue University Global |
| Program | MS in Finance |
| Updated | October 2026 |
Free sample paper for GF584 Unit 7
Fix 60 Percent Because the Budget Says So: A Unit 7 Interest Rate Swap Memo on a Term Loan
[Student Name]
Purdue University Global
GF584: Treasury Management II
Unit 7 Interest Rate Swap Memo
[Instructor Name]
[Date]
The dryer maker, its loan, the swap rate and the scenarios are composite and illustrative; the articles cited are real.
To: Treasurer and Chief Financial Officer From: Treasury Analyst Re: Fixing part of the $90 million term loan
Recommendation
Enter a five-year pay-fixed swap on $54 million of the term loan at 3.58 percent, making 60 percent of the loan fixed at an all-in 5.18 percent. This is the smallest round share that keeps interest cost within the board's tolerance if rates rise 200 basis points above the forward curve. At today's rate it lowers first-year interest by about $254,000.
The Loan
The term loan is $90 million at Term SOFR plus 1.60 percent, with five years to run. Term SOFR is 4.05 percent, so the floating cost today is 5.65 percent. A five-year pay-fixed swap at 3.58 percent, plus the same 1.60 percent spread, gives an all-in fixed cost of 5.18 percent.
Neutral on the Forecast
The memo does not recommend fixing because rates are expected to rise. The swap rate reflects the market's expected path of SOFR over five years. Along that path, fixed and floating cost the same: about $4.662 million a year whichever share is fixed. The lower swap rate than today's SOFR simply says the market expects rates to fall. Choosing a share because of a rate view would be speculation, and research on swap use finds that firms often adjust their fixed share according to the shape of the yield curve rather than to hedge, which is the behavior this memo avoids (Faulkender, 2005).
A Tolerance Written as a Number
The board has set a tolerance: annual interest may not exceed budget, $4.662 million, by more than $0.75 million in a scenario where rates run 200 basis points above the forward curve. That is the second question, and it drives the answer.
The Scenario Table
Annual interest, in millions, for three fixed shares:
1. Along the forward curve: 4.662 unhedged; 4.662 at 60 percent fixed; 4.662 fully fixed.
2. Rates 200 basis points above the curve: 6.462 unhedged; 5.382 at 60 percent; 4.662 fully fixed.
3. Rates 150 basis points below the curve: 3.312 unhedged; 4.122 at 60 percent; 4.662 fully fixed.
Solving for the Fixed Share
Unhedged, the rising scenario adds $1.80 million above budget. Each percentage point fixed removes 1 percent of that excess. To stay within $0.75 million, the floating share can be no more than 0.75 divided by 1.80, about 41.7 percent, so at least 58.3 percent must be fixed. Rounding up to 60 percent gives $54 million and leaves $0.72 million above budget in the rising case.
The fixed share comes from the board's tolerance, not from a view on rates: along the expected path every choice costs the same, so the only question is how much variation the budget can bear, and that question has a numerical answer of at least 58.3 percent.
Why Not All of It
Fixing the whole loan would remove all variation but give up the full benefit if rates fall: in the falling scenario, unhedged interest would be $3.312 million against $4.662 million fixed, a forgone saving of $1.35 million a year. The 60 percent choice keeps $0.54 million of that benefit.
The second reason is prepayment. The loan can be repaid early if the company refinances or sells a division, but the swap cannot be canceled for free. Unwinding it would cost or earn its market value, about $24,300 per basis point that the five-year swap rate falls below 3.58 percent on $54 million. A 100-basis-point fall would make unwinding cost about $2.4 million. Fixing only 60 percent limits that exposure.
Hedging Versus Timing
Evidence on firms' swap use shows that some companies use swaps to hedge and others to time rate moves, and that the timing users show more volatile results (Chernenko & Faulkender, 2011). Tying the share to a stated tolerance, and documenting it, keeps this program on the hedging side. A cross-sectional study of swap users found that firms with more floating debt and higher distress costs are the most likely to swap to fixed, which describes a company carrying $90 million of floating debt through a plant expansion (Visvanathan, 1998).
Implementation
1. Counterparty: the swap should go to one of the four revolver banks rated A-minus or better, chosen by competitive quotes from at least three.
2. Documentation: the hedge relationship, the loan it covers and the method for testing effectiveness should be documented at inception so the swap qualifies for hedge accounting.
3. Reporting: the swap's market value and the fixed share should be reported to the finance committee quarterly.
Approval
The notional exceeds the chief financial officer's limit, so the swap requires finance committee approval.
References
Chernenko, S., & Faulkender, M. (2011). The two sides of derivatives usage: Hedging and speculating with interest rate swaps. Journal of Financial and Quantitative Analysis, 46(6), 1727-1754. https://doi.org/10.1017/S0022109011000391
Faulkender, M. (2005). Hedging or market timing? Selecting the interest rate exposure of corporate debt. The Journal of Finance, 60(2), 931-962. https://doi.org/10.1111/j.1540-6261.2005.00751.x
Visvanathan, G. (1998). Who uses interest rate swaps? A cross-sectional analysis. Journal of Accounting, Auditing & Finance, 13(3), 173-200. https://doi.org/10.1177/0148558X9801300301
The Purdue Global GF584 Unit 7 instructions
The seventh GF584 unit asks for a memo recommending how much of a floating loan to fix with a swap. Lead with the recommendation and its basis. Describe the loan and the swap terms, including the all-in fixed rate. Separate two questions: whether fixing is expected to be cheaper, on which the swap rate is neutral, and how much variation the budget can bear. State the tolerance as a number. Build a scenario table for several fixed shares under the forward curve, a rising case and a falling case. Solve for the minimum fixed share. Explain why the company should not fix everything, including the benefit forgone and the cost of unwinding if the loan is prepaid. Cover counterparty selection, documentation, reporting and approval. Cite research on swap use in APA 7.
Inside the GF584 Unit 7 example
The memo opens with the recommendation to swap $54 million and its first-year saving of about $254,000. The loan and swap terms follow. A section explains why the swap rate is neutral on the forecast, citing Faulkender on firms that time the yield curve. The board's tolerance is stated, and a table gives annual interest for three fixed shares in three scenarios. The minimum share is solved at 58.3 percent, and the highlighted sentence separates the two questions. A section on why not to fix everything prices the forgone benefit and an unwind cost of about $24,300 per basis point. Chernenko and Faulkender and Visvanathan inform a section on hedging versus timing, implementation steps follow, and the memo closes on committee approval.
Reading the GF584 Unit 7 grading rubric
Graders of GF584 swap memos look first for correct all-in rates and a scenario table that follows from them. The analytical share rewards separating the rate forecast from budget tolerance and solving for the fixed share rather than choosing a round number. Recognizing that fixed and floating cost the same along the forward curve shows understanding of swap pricing. Instructors in the MS in Finance program value a priced explanation of why the company should not fix everything, including prepayment and unwind costs. Implementation details such as counterparty choice, hedge documentation and approval limits show practical readiness. Research on swap use cited in APA 7 completes the scoring.
GF584 Unit 7 help: mistakes that cost points
Many GF584 Unit 7 memos recommend fixing because rates might rise, which is a forecast the swap rate has already priced. Others pick 50 or 100 percent without connecting the share to any tolerance. Scenario tables show only rising rates, hiding the cost of fixing if rates fall. The cost of unwinding a swap when a loan is prepaid is ignored. Approval limits are not checked against the notional. Whatever loan the case describes, build the memo in this sequence: recommendation, loan and swap terms, neutrality on the forecast, tolerance as a number, scenarios, the solved share, reasons not to fix all, implementation and approval.
Get a GF584 Unit 7 example written to your instructions
Loan terms, the swap quote and any budget or covenant limits your Unit 7 case states, with the prompt and rubric, give the memo its inputs. A custom version sets out scenarios across fixed shares, derives the recommended share from a stated tolerance and prices the exit; it comes back within 24-48h, free the first time. The paper above is an original model document written by our desk, not a submitted student paper and not an official Purdue University Global document.
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GF584 Unit 7 questions, answered
Does a pay-fixed swap mean the firm expects rates to rise?
Not necessarily. The swap rate reflects the market's expected path of floating rates, so fixing is not a bet that rates will rise above that path. Firms fix to make interest costs predictable, to protect a covenant or budget, or to match fixed-rate assets. A memo that explains the motive in those terms reads more convincingly than one built on a rate forecast.
Why is the swapped all-in rate below today's floating rate?
Because the curve in the example slopes downward: the market expects the floating benchmark to fall over the five years, so the average expected rate, which the swap rate reflects, sits below today's level. In the first year the fixed payer pays less than floating; later, if the curve proves right, it pays more. Over the life, expected costs match.
What is hedge documentation and why does the memo mention it?
Under hedge accounting rules, a firm that wants a swap's value changes to flow through other comprehensive income rather than earnings must document the hedging relationship, its objective and how effectiveness will be assessed, at inception. Without it, value changes hit earnings each period. Memos typically note the requirement and assign responsibility rather than working through the accounting.
Where can I find a free GF584 Unit 7 sample paper?
This page carries a full GF584 Unit 7 interest rate swap memo recommending a 60 percent fixed share on a $90 million term loan, with scenarios, a solved minimum, unwind costs and APA 7 references.
How was the 58.3 percent minimum found?
Unhedged, the rising scenario adds $1.80 million above budget. The board allows $0.75 million, so no more than 0.75 divided by 1.80, about 41.7 percent, can float, leaving at least 58.3 percent fixed.