Question

- 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%

Answer #1

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% |
|||||

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%

21. Firm AAA can borrow at 6% fixed or in the floating-rate
market at LIBOR flat. BBB can borrow at 7.5% 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 and BBB both want to borrow $50 million
for five years and have been offered the following rates per
annum:
Fixed rate
floating rate
AAA
6.5%
LIBOR
BBB
8.0%
LIBOR
Which of the following statements is
correct under the comparative advantage argument if they want to
transform the interest rates between fixed and floating?
BBB borrows at 6.5% and AAA at 8%, and then they enter into a
swap
AAA borrows at 6.5% and BBB at LIBOR, and then...

Companies AAA and BBB are offered the following rates per annum
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LIBOR exchange) swap with a 20-basis-point spread, which will
appear equally attractive to AAA and BBB.
Fixed Rate
Floating Rate
AAA
8%
LIBOR-0.5%
BBB
7%
LIBOR+0.5%
Total gain of the swap is:
The net gain of the swap to...

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they want to transform the interest rates between fixed and
floating?
A) AAA borrows at LIBOR and BBB at 8.0%, and then they enter
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You can convert the fixed rate to a...

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2. Companies AAACorp and BBBCorp have been offered the following
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