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?

a. Libor – 0.375

b. 3.625%

c. Libor + 0.625

d. 4.75%

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