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is a $13.69 million loss. But the partnership also holds LIBOR
Notes, which decrease in value when interest rates fall. The
effect of holding a 15-percent share of the LIBOR Notes through
the partnership is to magnify the net effect of a fall in
interest rates: If the partnership did not hold LIBOR Notes the
market value of Colgate's net worth would decline by $13.69
million; the LIBOR Notes increase this loss to $15.34 million.
Now consider the effects of an increase in interest rates on
Colgate's net worth. The Colgate bonds decrease in value by
$12.94 million. The benefit to Colgate of having lower financing
costs than the prevailing market rates is partially offset by
Colgate's 15-percent share of the capital loss experienced by the
partnership. But the net effect for Colgate is a gain. Colgate
also benefits from the appreciation of the LIBOR Notes: If the
partnership did not hold LIBOR Notes, the market value of
Colgate's net worth would increase by $11 million; the LIBOR
Notes increase Colgate's gain to $12.48 million. Thus, once
again, the effect of the LIBOR Notes is to magnify Colgate's
exposure to interest rates. From the perspective of Colgate's
overall financial position, the LIBOR Notes do not function as a
hedge at all.
There is a curious inconsistency in Pohlschroeder's
memorandum between his discussion of how the partnership will
serve Colgate's liability management objectives and his
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