Question

Company Econ can borrow USD 10 million from Bank A for 2 years at a fixed and floating rate. Econ prefers to borrow at fixed rates on a semi-annual basis. Bank A offers the following pricing schedule for 6-month US dollars LIBOR, where the rates are mid-rates: Bank A's Pricing Schedule (2 years) for Company Econ Fixed interest rate per Floating interest rate per annum annum 9 % USD LIBOR + 34 basis points Bank A takes a bid-offer spread of 50 basis points. Company Ecave can borrow USD 10 million from Bank B for 2 years at a fixed and floating rate. Ecave prefers to borrow at floating rates on a semi-annual basis. Bank B offers the following pricing schedule for 6-month US dollars LIBOR, also using mid-rates: Bank B's Pricing Schedule (2 years) for Company Ecave Fixed interest rate per annum Floating interest rate per annum 7.6 % USD LIBOR + 30 basis points Bank B takes a bid-offer spread of 70 basis points. Currently, USD LIBOR is 8% per annum. What total cost savings (basis points per half year) are available if Company Econ initially borrows from its bank at a floating rate and Company Ecave borrows from its bank at a fixed rate and then joins an interest rate swap? Econ and Ecave agreed that a swap of fixed rate P% (per half year) against LIBOR is fair.

Answer 1

. It Econ Borrows at and Ecare Borrows I loat rate fixed rate company Econ Ecare floating rato 4.17 (870:34) fixed rate 3.87. Applicable 4.17% Intrest rate It Econ to If they Borrows at their respective rates (Llithout Swap) Ecom Ecare 4:15 / 8+0-3 company. floating fixed rater 31.5%(%) 1.51 4.15) Applicable Rates

Calculation of savings in Intrest sates Ecare Econ Applicable Intrest rate with Swap 3.8% H.177 wag 4.5% 4.157 without Savings 0.7 -0.02% Total Saring = 0.721 (et). 72 basis points 7 0:68%.coo) 68 Basis points

The saving of 68basis points is shared between both companies in order to get equal or same borrowing cost.