Companies AAA and BBB are offered the following rates per annum on a $5 million 10year loan. AAA requires a floatingrate loan while BBB requires a fixedrate loan. Bank of America (BOA) is planning to arrange a fixedforLIBOR (= R% & LIBOR exchange) swap with a 20basispoint spread, which will appear equally attractive to AAA and BBB.
Fixed Rate 
Floating Rate 

AAA 
8% 
LIBOR0.5% 
BBB 
7% 
LIBOR+0.5% 
(Show % with Pay and Receive)
(Show % with Pay and Receive)
Strong party=AAA  
Becausse low interest rate  
Interest rate differential  
FiXed leg differential(65)=1  
Floating rate differential(0.50.5)=0  
If AAA has fixed rate loan and wants floating rate loan and  
If BBB has floating rate loan and wants fixed rate loan then the SWAP can be entered  
Since the requirment is satisfied SWAP can e entered  
Net interest differential=10=1  
If nothing is paid to intermediary then AAA=0.5 and BBB=0.5 
SWAP operations 
AAA  BBB 
Payment of interest5%  Payment of interest (LIBOR0.5) 
receipt from BBB=(5+0.5)=5.5  receipt from AAALIBOR+0.5 
Payment to BBB=(LIBOR+0.5)  Payment to BBB=5.5 
Total=LIBOR  Total=6.5 
LIBOR=6.5 
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