Question

Steelers & Penguins Sports Clubs both seek the lowest financing cost. They face the following rates:

                                                                             Steelers                                    Penguins                

Credit Rating                                                          A                                            BBB

Cost of fixed funds                                             4.0%                                         5.5%

Cost of floating funds                            6 MO Libor + 1.00%               6 MO Libor + 1.75%

If a swap is set up such that any potential savings are divided equally between the two clubs, what will be the net post swap cost for Steelers?

Answer 1

Solution

Fixed Cost for

Steelers = 4.0%

Penguins = 5.5%

Floating Cost for

Steelers = 6 Month LIBOR + 1.00%

Penguins = 6 Month LIBOR + 1.75%

In case of Floating for Steelers and Fixed For Penguins , Total Cost = LIBOR + 1.00% + 5.50% = LIBOR + 6.50%

Now in case Fixed for Steelers and Floating for Penguins , total Cost = 4.0% + LIBOR + 1.75% = LIBOR + 5.75%

Now Overall Cost Benefit = 0.75%

Now Benefit to each = 0.75% / 2 = 0.375%

Now Net Post Swap Cost for Steelers = LIBOR + 1.00% - 0.375% = LIBOR + 0.625%