Question

PUMA SE and Adidas AG have been offered the following rates:

        

	Fixed Rate	Floating Rate
PUMA SE	3.5%	3-month LIBOR plus 10bp
Adidas AG	4.5%	3-month LIBOR plus 30 bp

Suppose that PUMA SE borrows fixed and Adidas AG borrows floating. If they enter into a swap with each other where the apparent benefits are shared equally, what is PUMA SE’s effective borrowing rate? (Show Work)

Answer 1

Solution :-

With out swap

The PUMA SE borrows Floating = LIBOR + 10BP

The Adidas AG borrow Fixed= 4.5%

Total Cost for both = LIBOR + 0.10% + 4.50% = LIBOR + 4.60%

After Swap

The PUMA SE borrows fixed = 3.5%

The Adidas AG borrow Floating = LIBOR + 30BP

Total Cost for both = LIBOR + 0.30% + 3.50% = LIBOR + 3.8%

Therefore Net Profit of interest cost due to swap agreement

= LIBOR + 4.60% - (LIBOR + 3.8%) = 0.80%

The profit of it distributed equally

So the The PUMA SE effective borrowing rate = LIBOR + 0.10%-0.40% = LIBOR - 0.30%