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Companies M and N have been offered the following rates per annum on a $100 million...

Companies M and N have been offered the following rates per annum on a $100 million eight-year loan:

_________________________________________

                                  Fixed Rate           Variable Rate

_________________________________________

Company M                 14%                   LIBOR + 1%

Company N                  18%                  LIBOR + 2%

_________________________________________

Company M requires a floating-rate loan; Company N requires a fixed-rate loan. A bank, acting as intermediary, will charge 1% per annum in a swap.

(a)    Calculate net gain from a swap that will appear equally attractive to both companies.

(b)    What rates of interest will M and N end up paying after the swap?

(c)    Diagrammatically present the swap in a figure.

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Expert Solution

SEE THE IMAGE. ANY DOUBTS, FEEL FREE TO ASK. THUMBS UP PLEASE

jeff jeffy answered 1 year ago
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