Question

Company A and Company B can borrow for a ten-year term at the following rates:

company A prefers floating rate and company B prefers fixed rate.

	Company A	Company B
Moody’s credit rating	AAA	AA
Fixed rate borrowing cost	7%	11%
Floating rate borrowing cost	LIBOR+1%	LIBOR+4%

a. Calculate the quality spread differential (QSD).

b. Assuming that Swap Bank desires to earn _____(please refer to Table 1 as shown below), compute the potential cost saving for each company A and B, if the ratio to divide the balanced cost saving is .

c. What are the effective cost savings for A and B.?

4. Show the transactions designed for A by the Swap Bank for A to achieve its desired effective cost of borrowing.

5. Show the transactions designed for B by the Swap Bank for A to achieve its desired effective cost of borrowing.

(Note that: Please provide detailed transactions for each of the three counter parties with an illustration chart.)

TABLE1

RATIO FOR SHARED BENEFIT BETWEEEN A AND B		SWAP BANK'S BENEFIT
A	B
7	7	0.20%

Answer 1

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