Company A can borrow fixed at 14.8 percent and floating at LIBOR percent. Company B can...
Company A can borrow fixed at 14.8 percent and floating at LIBOR percent. Company B can borrow fixed at 16.2 percent and floating at LIBOR+ 0.35 percent. A financial intermediary charges a fee of 0.14 percent. Company A wishes to borrow floating and company B wishes to borrow fixed. Assume the gain is evenly split between the two parties and floating rate legs are LIBOR. Design the swap. What is the company A's fixed rate leg and company B's fixed rate leg, respectively.
A: receive 15.255, B: pay 15.395 percent
A: pay 15.255, B: receive 15.395 percent
A: receive 15.395, B: pay 15.255 percent
A: receive 14.345, B: pay 17.005 percent
Show Work Please
Homework Answers
As A has competitive advantage in borrowing fixed rate at 14.8%, A will borrow in fixed rates, while B has competitive advantage in borrowing floating rate, B will borrow in floating rate. A total of 0.14% will be paid to Financial institution at the intermediary.
The rate flow will looks like.
So in this flow, Final rate of A is LIBOR-0.455%
Final rate of B = 15.745%
Both the company have got a benefit of 0.455%
And FI charge a fee of 0.14%.
So A: receive 15.255, B: pay 15.395 percent is correct.
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