Sixty percent fixed because a budget tolerance requires it, not because the curve predicts it, is the reasoning behind this GF584 Unit 7 interest rate swap memo for an Iowa manufacturer. Searches like "gf 584 unit 7 assignment example", "gf584 unit 7 sample" and "gf584 unit 7 example" land here.
What a finished GF584 Unit 7 interest rate swap memo looks like
Three pages go to the treasurer and chief financial officer, recommendation first. The loan is 90 million at Term SOFR plus 1.60 percent with five years to run; Term SOFR sits at 4.05, so the floating cost is 5.65 percent today. A five-year pay-fixed swap at 3.58 percent would make the all-in fixed cost 5.18. The scenario table gives annual interest for three fixed shares: along the forward curve every choice costs 4.662 million; with rates 200 basis points above the curve, 6.462 million unhedged, 5.382 at 60 percent fixed and 4.662 fully fixed; 150 basis points below, 3.312, 4.122 and 4.662. The board's tolerance, no more than 0.75 million above budget in the rising case, requires at least 58.3 percent fixed. The memo recommends 60, saving about 254,000 in the first year at today's rate.
How a GF584 Unit 7 example is structured
The memo separates two questions that are often merged: whether fixing is expected to be cheaper, and how much variation the firm can bear. On the first it is neutral. The swap rate reflects the market's expected path, so along that path fixed and floating cost the same, and the memo says so before any scenario appears. The second question drives the answer. Budget tolerance is stated as a number, the scenario table is built around it, and the minimum fixed share is solved rather than picked. Reasons for not fixing everything follow: the benefit forgone if rates fall, and the cost of unwinding if the loan is prepaid, about 24,300 per basis point on the swapped amount. Implementation closes the memo: counterparty selection, hedge documentation at inception and the reporting line to the finance committee.
Neutral on the forecast
Along the forward curve the fixed and floating costs are identical at 4.662 million a year, and the memo states that before any scenario is shown.
A tolerance written as a number
Interest may exceed budget by no more than 0.75 million in a year when rates run 200 basis points above the curve; that sentence drives the rest of the memo.
Solving for the fixed share
With 90 million floating, each point of fixed share cuts the rising-rate overrun by 18,000, so the tolerance requires 58.3 percent, rounded up to 60.
Why not all of it
Fully fixed, the firm forgoes 1.35 million a year if rates fall 150 basis points below the curve; at 60 percent it forgoes 0.81 million and keeps 0.54 million.
Unwind cost priced upfront
A five-year pay-fixed swap on 54 million changes value by about 24,300 per basis point, the exposure the firm takes on if the loan is repaid early.
Where marks go in GF584 Unit 7
Treating the decision as a rate forecast is how GF584 swap memos most often forfeit the judgment criterion: fix because rates will rise, or float because they will fall, with nothing the firm could actually measure. Graders look for the recognition that the swap rate already embeds the expected path. A memo recommending a fixed share without deriving it, sixty percent because it sounds balanced, invites the question of why not fifty or seventy. Scenario tables showing only a rate rise make fixing look free. Unwind cost is the omission noticed most in firms with any chance of prepaying. Covenant and coverage effects stated without numbers read as boilerplate. Credit and documentation matters, counterparty limits and hedge designation at inception, are small items that many rubrics still check.
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.
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.