how otterbein benefits from its new swaption whether interest rates rise or fall

Given the current market’s flat yield curve and low swap rates, Sims worked with Otterbein Homes (“Otterbein”) in Ohio to evaluate their current swap portfolio. Otterbein had an existing swap originally entered into in 1998 due to mature in July, 2008 under which Otterbein pays a fixed rate of 4.59% and receives a variable rate index equal to BMA. In order to take advantage of low swap rates and to help alleviate Otterbein's debt service payments, Sims worked with Otterbein to competitively bid out an interest rate swaption to take advantage of the current rate environment. Under the terms of the swaption, the swap provider was given the option to exercise on the new swap when the current swap expires (July, 2008). The new swap provider paid Otterbein upfront for the option to exercise this swap. The money received by Otterbein can be used to offset the cost of their current swap, effectively reducing the rate on their current swap, and thus, their annual debt service costs, by over 1.10% (on a present value basis). In addition, if the new swap provider decides not to exercise its option, Otterbein still keeps the upfront payment. If the swap Provider does exercise its option, under the terms of the new swap, Otterbein will pay a fixed rate of 3.80% for 5 years and receive 68% of one-month LIBOR.