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Guido International, a German firm, can borrow money at a fixed rate of 6.2 percent or...

Guido International, a German firm, can borrow money at a fixed rate of 6.2 percent or a variable rate based on 7 percent, plus or minus 2 percent. Guido wants a variable rate loan. Holger Worldwide, also a German firm, can borrow money at a fixed rate of 6.5 percent or a variable rate of 6.75 percent, plus or minus 1.5 percent. Holger prefers a fixed rate loan. What should Guido and Holger do? Please show all the steps.

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Answer #1

Solution :-

In case of Guido International , Prefer = Variable Rate Loan

Fixed rate = 6.2%

Variable Rate = 7% plus minus 2%

In case of Holger , Prefer Fixed Rate loan

Fixed rate = 6.5%

Variable Rate = 6.75% plus minus 1.5%

Now  Guido and Holger should do Interest rate swap

In swap , Guido international take Fixed Rate loan for Holger and Holger take Variable rate loan for Guido international

Due to Interest Rate Swap , Overall Interest Saved ( 6.50% - 6.20% ) + ( 7% - 6.75% )

= 0.55%

Which is divided to both parties

if there is any doubt please ask in comments

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