Question

Company A, a lower-rated firm, desires a fixed-rate loan. Company A presently has access to floating interest rate funds at a margin of 1.7% over LIBOR. In contrast, company B, a higher-rated firm, prefers a floating-rate loan. Company B has access to fixed-rate funds at 11% and floating-rate funds at LIBOR+0.7%. Both companies enter into an interest rate swap with Bank C. Based on the swap, Bank C would gain 0.4% and each of the two companies would gain 0.6%. What is the current fixed rate available for Company A?

Please provide detailed explanation

Answer #1

Since company B prefers a floating rate loan, they would take it from company A and similarly company A, since they want a fixed-rate loan, will take it from company B. Now, the total benefit, in this case, will be the benefit obtained by each firm plus the benefit obtained by the bank. Hence, total benefit = 0.6 + 0.6 + 0.4 = 1.6%. Now, since company A is using its floating rate = Libor + 1.7% and company B is using its fixed-rate = 11%, the total cost will be = Libor + 12.7%. The cost of the reverse option where A takes a fixed-rate loan (let it be at A%) and B takes a floating rate = Libor + 0.7%, the total cost will be = Libor + 0.7 + A. This cost should be more than the current cost by 1.6%. Hence, we have:

Libor + 0.7 + A = Libor + 12.7 + 1.6

Hence, A = 13.6%.

Hence, 13.6% will be the fixed rate available for company A.

Press F, a BBB-rated firm, desires a fixed rate, long-term loan.
Press F presently has access to floating interest rate funds at a
margin of 1.42% p.a. over LIBOR. Its direct borrowing cost is
10.47% p.a. in the fixed rate bond market. In contrast, B.D.
Energy, which prefers a floating rate loan, has access to fixed
rate funds in the Eurodollar bond market at 7.20% p.a. and floating
rate funds at LIBOR + 0.29% p.a. Suppose they enter into an...

Company A desires a variable-rate loan but currently has a
better deal from the fixed-rate market at a rate of 11%. If Company
A borrows from the variable-rate market, the cost would be
LIBOR+2%. In contrast, Company B, which prefers a fixed-rate loan,
has a better deal from the variable-rate market at LIBOR+3%. If
Company B borrows from the fixed-rate market, the cost would be
15%. What is the spread differential between Companies A and B?

Question 6
Suppose firm ABC has access to fixed rate 7.5%, and floating
rate of Euribor + 1.5%, while XYZ had access to fixed rate 7% and
floating rate Euribor + 0.5%. For these two firms:
For these two firms, if a swap would work, and if we ignore the cut
to a swap dealer, the total amount both firms
combined could gain is:
0.5%
1.0%
1.5%
It can vary depending on how they split

company B requires a fixed rate loan. Design a swap that will
net a bank, acting as intermediary, 0.2% per annum and that will
appear equally attractive to both companies. Companies A and B have
been offered the following rates per annum on a $10 million
five-year loan:
Fixed Rate
Floating Rate
Company A
5.25%
LIBOR + 0.35%
Company B
6.85%
LIBOR + 1.0%
Company A requires a floating rate
loan;

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...

Firm B, with a better credit rating, has lower borrowing costs
in both types of borrowing. Firm A and Firm B face the following
rate structure: (3pts)
Preferred
Fixed
Floating
Firm
A Fixed
8.0%
6-month LIBOR+0.6%
Firm
B
Floating
6.8%
6-month LIBOR
a) Devise a swap agreement (without a swap bank) such
that A and B will share the benefit equally? Compute the after-swap
borrowing costs for Firm A and Firm B, and also determine cost
savings for both...

21. Firm AAA can borrow at 6% fixed or in the floating-rate
market at LIBOR flat. BBB can borrow at 7.5% fixed or at
LIBOR+0.5%. AAA wants to borrow floating and BBB fixed, so that
they are interested in entering into an interest-rate swap. What is
the swap fixed rate that is equally attractive to both firms?
Assume that there is no financial intermediary involved in the swap
transaction.
A) 7% B) 6.5% C) 6% D) 5.5%

Consider the borrowing costs faced by the following three
companies:
Fixed Floating
A 5.0% LIBOR+0.6%
B 6.0% LIBOR+1.3%
C 7.0% LIBOR+2.5%
Assume if entering the swap transaction, they split the possible
savings equally.
A) Company A and B want to engage in the swap transaction. What
is the possible combined savings for both companies?
B) Suppose company C wants to borrow fixed rate funds. Is it
possible for C to reduce its cost of borrowing below 7%, and if so...

Consider this scenario: An American company would like to barrow
fixed-rate yen. They can barrow fixed-rate yen at 5.4% or
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borrow fixed-rate yen at 5.8% or floating-rate dollars at LIBOR +
1.7%. What is the total cost savings which can be realized through
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Firm AAA can borrow at 5% fixed or in the floating-rate
market at LIBOR+0.5%. BBB can borrow at 7% fixed or at LIBOR+0.5%.
AAA wants to borrow floating and BBB fixed, so that they are
interested in entering into an interest-rate swap. What is the swap
fixed rate that is equally attractive to both firms? Assume that
there is no financial intermediary involved in the swap
transaction.
A)
7%
B)
6.5%
C)
6%
D) 5.5%

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