Inside Third & Bond: Week 59


This week, the Hudson bloggers tackle a topic that's been in the news a lot lately—LIBOR.

We got interest rate insurance for a rainy day, and guess what, it’s raining. On 10/13/08, LIBOR (a key interest rate – measures how much banks charge each other for loans) was 4.56%. We just made $5,000. Or, saved $5,000, depending on if you’re a glass half full or glass half empty kind of person. How did we do it and can you do it, too? Just send us three easy installments of $19.95 and we’ll send you our book and audiocassette. Or read Week 27’s posting along with this one. Oh, and you’ll need a 54,000-square foot development project, too.

Remember back in Week 27, when we talked about swaps/caps/collars? A quick refresher: Our loan is a floating loan, the interest rate adjusts daily. In order to go to sleep at night, there are things we can do to minimize our interest rate risk. A swap is exchanging a floating interest rate for a fixed rate for part or all of your debt. A cap is a ceiling on a floating interest rate. If LIBOR’s rate goes higher than the capped rate then the bank pays you back that increment. A collar is a floor on a floating interest rate; if you agree to a floor, then the bank’s risk is reduced and sometimes they won’t charge you a fee for the cap. In the end, we went with just an interest cap. Interest rates were low but trending up so we considered the cap an insurance policy against a tremendous rise in interest rates. We paid a fee and secured a 4.00% cap on the LIBOR rate during the course of our construction loan; no matter how high the LIBOR rate might go, the most we’ll pay is 4%.

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