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Assume firm A wants to borrow float while firm B wants to borrow fixed. Firm A...

Assume firm A wants to borrow float while firm B wants to borrow fixed. Firm A is offered 10% fixed borrowing cost and LIBOR + 0.3% float borrowing cost while firm B is offered 11.2% fixed borrowing cost and LIBOR + 1% float borrowing cost.

  1. Show how the two firms can reduce their borrowing costs equally by entering into an interest rate plain vanilla swap? Use a table to demonstrate your solution
  2. If the agreed-upon notional amount is $100m (no need to know the swap tenor), how much each party annually pays the other in absolute amounts? (assume that the LIBOR = 5%). Show your answer in a table similar to that in (a) solution

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jeff jeffy answered 1 year ago
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