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Company A can borrow fixed at 13.3 percent and floating at LIBOR+ 0.6 percent. Company B...

Company A can borrow fixed at 13.3 percent and floating at LIBOR+ 0.6 percent. Company B can borrow fixed at 12.1 percent and floating at LIBOR+ 0 percent. If a financial intermediary charges a fee of 0.12 percent, what is the gain to each party to the swap? Assume the gain is evenly split between the two parties.

0.84 percent

0.3 percent

0.24 percent

0.36 percent

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Answer #1

Given

Company Fixed rate Floating rate

Company A 13.3% LIBOR + 0.6%

Company B 12.1% LIBOR

Difference 1.2% 0.6%

Given the differences in rates between the two markets, the two parties can achieve a combined 60 basis

point savings through company A borrowing floating-rate dollars at LIBOR + 0.6% and Company borrowing fixed-

rate yen at 12.1% and then swapping the proceeds.

In between Financial Institution fee = 0.12%

So total benefit can be 0.6% - 0.12% = 0.48%

Dividing equally among them, one company can have a profit of 0.24%

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