Question

There are two companies, A and B. They have the following fixed and floating borrowing costs:...

There are two companies, A and B. They have the following fixed and floating borrowing costs:
A B

Fixed rate borrowing 4.5% 6%

Floating rate borrowing LIBOR LIBOR + .75%

A plans to borrow floating rate from Bank X and B plans to borrow fixed from Bank Y. Both companies are taking 5 year $100,000,000 loans with quarterly payments. A and B will then enter a swap contract with each other.

(a) Design a fixed-for-floating swap in which A and B will have an equal cost savings in their borrowing costs after the swap. Draw a diagram that shows the payment to each party (A, B, X, Y) every quarter after the swap.

(b) If A and B contract through SwapBank that charges a fee, how much would each company be willing to pay the swap bank to take the other side of the swap? (Describe in terms of percentage the fee the bank is charging)


0 0
Add a comment Improve this question Transcribed image text
Request Professional Answer

Request Answer!

We need at least 10 more requests to produce the answer.

0 / 10 have requested this problem solution

The more requests, the faster the answer.

Request! (Login Required)


All students who have requested the answer will be notified once they are available.
Know the answer?
Add Answer to:
There are two companies, A and B. They have the following fixed and floating borrowing costs:...
Your Answer:

Post as a guest

Your Name:

What's your source?

Earn Coins

Coins can be redeemed for fabulous gifts.

Similar Homework Help Questions
  • Company X wants to borrow $10,000,000 floating for 5 years & company Y wants to borrow...

    Company X wants to borrow $10,000,000 floating for 5 years & company Y wants to borrow $10,000,000 fixed for 5 years. Company X and Y fixed rate borrowing costs are 10% and 12% respectively Company X and Y floating rate borrowing costs are LIBOR and LIBOR plus 1.5% respectively. A swap bank proposes the following interest only swap Y will pay the swap bank annual payments on $10,000,000 with a fixed rate of rate of 9.90%. In exchange the swap...

  • Company X wants to borrow $10,000,000 floating for 5 years & company Y wants to borrow...

    Company X wants to borrow $10,000,000 floating for 5 years & company Y wants to borrow $10,000,000 fixed for 5 years. Company X and Y fixed rate borrowing costs are 10% and 12% respectively Company X and Y floating rate borrowing costs are LIBOR and LIBOR plus 1.5% respectively A swap bank proposes the following interest only swap X will pay the swap bank annual payments on $10,000,000 with the coupon rate of LIBOR- 0.15%, in exchange the swap bank...

  • QUESTION 1 Company X wants to borrow $10,000,000 floating for 5 years & company Y wants...

    QUESTION 1 Company X wants to borrow $10,000,000 floating for 5 years & company Y wants to borrow $10,000,000 fixed for 5 years. Company X and Y fixed rate borrowing costs are 10% and 12% respectively. Company X and Y floating rate borrowing costs are LIBOR and LIBOR plus 1.5% respectively. A swap bank proposes the following interest only swap X will pay the swap bank annual payments on $10,000,000 with the coupon rate of LIBOR -0.15 percent; in exchange...

  • Company X wants to borrow $10,000,000 floating for 5 years; company Y wants to borrow $10,000,000...

    Company X wants to borrow $10,000,000 floating for 5 years; company Y wants to borrow $10,000,000 fixed for 5 years. Their external borrowing opportunities are shown here: Fixed-Rate Borrowing Cost Floating-Rate Borrowing Cost LIBOR LIBOR + 1.5% Company X Company Y 10% 12% A swap bank proposes the following interest only swap: Y will pay the swap bank annual payments on $10,000,000 with a fixed rate of rate of 9.90 percent. In exchange the swap bank will pay to company...

  • 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 Show Work Please

  • Two firms X and Y are able to borrow funds as follows: Firm A: Fixed-rate funding...

    Two firms X and Y are able to borrow funds as follows: Firm A: Fixed-rate funding at 3.5% and floating rate at Libor-1%. Firm B: Fixed-rate funding at 4.5% and floating rate at Libor+2%. Assume A prefers fixed rate and B prefers floating rate. Show how these two firms can both obtain cheaper financing using a swap. What swap strategy would you suggest to the two firms if you were an unbiased advisor? What is the net cost to each...

  • International Oil plc is interested in raising £100 million in order to carry out further oil...

    International Oil plc is interested in raising £100 million in order to carry out further oil exploration. International oil is an AA-rated company and, as such can borrow for 12 months at a fixed rate of 12 per cent or a floating rate of LIBOR +30 basis points. London Property Ltd has a lower credit rating, and wishes to raise a similar sum for investment in the housing market. London Property can only borrow at a fixed interest rate of...

  • 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...

  • Companies A and B have been offered the following rates per annum on a $20 million...

    Companies A and B have been offered the following rates per annum on a $20 million 5-year loan, and a bank, acting as intermediary, will charge 0.10% per annum (10 basis points) to arrange and manage the swap, which appears equally attractive to A and B. Fixed Rate Floating Rate Company A 6.0% LIBOR Company B 7.2% LIBOR + 0.50% Company A requires a floating-rate loan, and company B requires a fixed-rate loan. What is the economic gain to each...

  • Company A prefer fixed rate and can borrow from Bank A. Bank A's Pricing Schedule Fixed...

    Company A prefer fixed rate and can borrow from Bank A. Bank A's Pricing Schedule Fixed interest Floating interest rate 9% LIBOR + 0.34% Bank A takes a commission of 0.2% Company B prefer floating rate and can borrow from Bank B. Bank B's Pricing Schedule Fixed interest Floating interest rate 7.7% LIBOR + 0.3% Bank B takes a commission of 0.3% . Both companies enter into an interest rate swap, what is the total cost saving? • If 40%...

ADVERTISEMENT
Free Homework Help App
Download From Google Play
Scan Your Homework
to Get Instant Free Answers
Need Online Homework Help?
Ask a Question
Get Answers For Free
Most questions answered within 3 hours.
ADVERTISEMENT
ADVERTISEMENT
ADVERTISEMENT