Question

Companies X and Y have been offered the following rates per annum on a $5 million 10-year investment:

	Fixed Rate	Floating
Company X	8%	LIBOR+0.3%
Company Y	8.8%	LIBOR

Company X requires a floating-rate investment; company Y requires a fixed-rate investment. Design a swap that will net a bank, acting as intermediary, 0.1% per annum and will appear equally attractive to X and Y. (Make all the floating interests equal to the Libor rate).

Answer 1

	Fixed Rate	Floating
Company X	8%	LIBOR+0.3%
Company Y	8.80%	LIBOR
	Preferred Rate	Rate available
Company X	LIBOR+0.3%	8%
Company Y	8.80%	LIBOR
Total	LIBOR + 9.2%	LIBOR + 8%
Inter-mediary bank will accet the preferred rates from Company X and Y and will pay the rate available to the lenders
Spread available with Intermediary bank	(LIBOR + 9.2%) - (LIBOR + 8%)
Spread available with Intermediary bank	1.20%
Kept by Bank with itself	0.10%
Spread available	1.10%
This spread will be distributed by Intermediary between Company X and Y equally
Rates Quoted by Intermediary
	Preferred Rates	Spread distributed	Rates Quoted
Company X	LIBOR+0.3%	-0.55%	LIBOR-0.25%
Company Y	8.80%	-0.55%	8.25%