Question

2. Companies AAACorp and BBBCorp have been offered the following rates per annum on a $10 million five-year loan:

Fixed rate Floating rate

AAA Corp 4.0% LIBOR - 0.1% BBB Corp 5.2% LIBOR - 0.6% |

Design an interest rate swap that will make all parties involved (bank, two companies) attractive assuming that BBBCorp wants to borrow at a fixed rate of interest, whereas AAACorp wants to borrow at a flotation rate of interest linked to six-month LIBOR.

Answer #1

Company | Fixed Rate | Floating rate | Preference | |

AAA | 4.00% | LIBOR - 0.1% | Floating | |

BBB | 5.20% | LIBOR - 0.6% | Fixed | |

Bank activity | ||||

Company | Rates received | Rates payable | ||

AAA | LIBOR - 0.1% | 4% | ||

BBB | 5.20% | LIBOR - 0.6% | ||

Total | LIBOR + 5.1% | LIBOR + 3.4% | ||

Spread avaialble with bank | (LIBOR + 5.1%)-(LIBOR + 3.4%) | |||

Spread avaialble with bank | 1.70% | |||

Spread sharing equally | 1.70%/3 | 0.57% | ||

Rates payable by each company | ||||

Paid to Inter-Bank | Spread | Net rates payable | ||

AAA | 4% | -0.57% | 3.43% | |

BBB | LIBOR - 0.6% | -0.57% | LIBOR - 1.17% | |

Companies AAA and BBB are offered the following rates per annum
on a $5 million 10-year loan. AAA requires a
floating-rate loan while BBB requires a fixed-rate loan. Bank of
America (BOA) is planning to arrange a fixed-for-LIBOR (= R% &
LIBOR exchange) swap with a 20-basis-point spread, which will
appear equally attractive to AAA and BBB.
Fixed Rate
Floating Rate
AAA
8%
LIBOR-0.5%
BBB
7%
LIBOR+0.5%
Total gain of the swap is:
The net gain of the swap to...

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).

AAA and BBB both want to borrow $50 million
for five years and have been offered the following rates per
annum:
Fixed rate
floating rate
AAA
6.5%
LIBOR
BBB
8.0%
LIBOR
Which of the following statements is
correct under the comparative advantage argument if they want to
transform the interest rates between fixed and floating?
BBB borrows at 6.5% and AAA at 8%, and then they enter into a
swap
AAA borrows at 6.5% and BBB at LIBOR, and then...

32. AAA and BBB both want to borrow $50 million for five years
and have been offered the following rates per annum: Fixed rate
floating rate AAA 8.0% LIBOR BBB 6.5% LIBOR Which of the following
statements is correct under the comparative advantage argument if
they want to transform the interest rates between fixed and
floating?
A) AAA borrows at LIBOR and BBB at 8.0%, and then they enter
into a swap B) AAA borrows at LIBOR and BBB at...

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%

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%

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%

Companies X and Y have been offered the following annual
interest rates with semi-annual compounding on $5 million 6-year
loans.
Company
Fixed Rate (%)
Floating Rate
X
5.00%
LIBOR
Y
7.00%
LIBOR + 1%
Company X borrows initially at a fixed rate but would like to
have a floating rate loan. Company Y borrows initially at a
floating rate but would like a fixed-rate loan.
a) What is the Quality Spread
Differential (QSD)?
b) What is the necessary
condition for a fixed-for-floating...

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;

Question 2:
Companies Alpha and Beta LLC are currently both based in
Chicago. They are both contemplating expanding their business by
taking a $28 million loan which will be spread over five years. The
following is what the market is currently offering them based on
their risk profiles:
Fixed Rate
Floating Rate
Alpha LLC
4.80%
LIBOR+0.2%
Beta LLC
6.40%
LIBOR+0.6%
(a) Which company has a comparative advantage in a fixed loan,
and which company has a comparative advantage in a...

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