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?
a. |
Libor + 0.625 |
|
b. |
4.75% |
|
c. |
3.625% |
|
d. |
Libor – 0.375 |
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Answer:
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%
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