Question

# Firm AAA can borrow at 5% fixed or in the floating-rate market at LIBOR+0.5%. BBB can...

1. 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%

 AAA BBB Calculation Difference Fixed Rate 5% 7% 7% - 5% 2% Floating Rate LIBOR+0.5% LIBOR+0.5% LIBOR+0.5% - LIBOR-0.5% 0 Net Difference 2% - 0 2% As nothing is given, so it is assumed that fain is splitted equally. Gain to each Party = 2%*50% = 1% Effective Rate of Interest Party Calculation Effective Rate AAA LIBOR+0.5%-1% LIBOR-0.5% BBB 7% - 1% 6% So, Effective Swap Fixed Rate = 6%

#### Earn Coins

Coins can be redeemed for fabulous gifts.