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In: Finance

Company A needs $30 million at a floating-rate to fund a 5-year project while Company B...

Company A needs $30 million at a floating-rate to fund a 5-year project while Company B desires $30 million at a fixed rate to complete its 5-year construction plans. Company A and Company B have been offered the following rates per annum on a $30 million 5-year loan:

Fixed rate

Floating rate

Company A:

12.0%

LIBOR + 0.1%

Company B:

13.4%

LIBOR + 0.6%


Answer the following questions,

  1. What might explain the differences in the rates offered to the two companies?
  2. What is the QSD in this case? and,
  3. Design a swap that will net a bank, acting as intermediary, 0.1% per annum and that will appear equally attractive to both companies. Show your calculations as you illustrate the transaction.

Solutions

Expert Solution

jeff jeffy answered 2 years ago
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