Rothmans Inc. — The Curious Case of the Interest Rate Swap
This case provides students with an opportunity to evaluate the mechanics and effectiveness of an interest rate swap in an actual situation. Rothmans Inc. entered into an interest rate swap in 2001, and the company’s public financial statements allow readers to follow the swap through several years until the eventual early pay-off in 2005. Students can determine if the decision to exit the interest rate swap early was good or bad. Rothmans has only one five-year bank term loan and one interest rate swap covering half of the value of the loan. This simplicity provides an excellent learning environment using publicly available data.
Students will be able to:
- Understand how an interest rate swap operates from inception to termination.
- Form their own opinions about the value of using interest rate swaps to manage against fluctuations in interest rates.
- Discuss the pros and cons of Rothmans’ management decisions as disclosed in the company’s public financial statements.
- Use market information to calculate the fair value of an interest rate swap at any date from inception to maturity (optional; intended for outside-of-class/lengthier assignments).
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