Question

Suppose that Company A borrows $100mil long-term at a cost of 8% p.a. and Company B...

Suppose that Company A borrows $100mil long-term at a cost of 8% p.a. and Company B can borrow $100mil short-term at a cost equal to the 6-month LIBOR rate plus a spread of 100 bps. Both companies agree to enter into an interest rate swap agreement whereby A pays the LIBOR rate plus 50 bps. to B, and B pays 8.5% p.a. fixed to A. What is the net borrowing cost to each company?

Business   Finance   
0 0
Add a commentTranscribed image text
Next >

Homework Answers

Answer #1

SEE THE IMAGE. ANY DOUBTS, FEEL FREE TO ASK. THUMBS UP PLEASE

0 0
Know the answer?
Your Answer:

Post as a guest

Your Name:

What's your source?

Earn Coins

Coins can be redeemed for fabulous gifts.

Log In

Sign Up

Not the answer you're looking for?
Ask your own homework help question
Similar Questions
Suppose that Dummy Ltd. can borrow $100mil long-term at a cost of 8% p.a. and Intelligent...
Suppose that Dummy Ltd. can borrow $100mil long-term at a cost of 8% p.a. and Intelligent Ltd. can borrow $100mil short-term at a cost equal to the 6-month LIBOR rate plus a spread of 100 bps. Both companies agree to enter into an interest rate swap agreement whereby Dummy Ltd. pays the LIBOR rate plus 50 bps. to Intelligent Ltd., and Intelligent Ltd. pays 8.5% p.a. fixed to Dummy Ltd. What is the net borrowing cost to each company? A....
4)   Company A has $125,000,000 of fixed interest debt with an interest rate of 7% which...
4)   Company A has $125,000,000 of fixed interest debt with an interest rate of 7% which it wants to swap into floating rate debt. Company B has floating rate debt at LIBOR plus 0.75% which it wants to swap for fixed rate. The two companies agree to an interest rate swap with a tenor of five years. The terms of the agreement call for a notional principle of $125,000,000, Company A pays Company B LIBOR plus 0.5% with a one...
(a) Prawn and Lobster are two companies that can borrow for a five year term at...
(a) Prawn and Lobster are two companies that can borrow for a five year term at the following rates. Prawn Lobster International credit rating A B Fixed-rate borrowing cost 6.5% 10.5% Floating-rate borrowing cost LIBOR + 1% LIBOR + 3% (i) Calculate the quality spread differential (QSD). Enter your answer as a percentage to 2 decimal places, e.g. 1.23 (1 Mark) Answer % (ii) Develop an interest-rate swap in which both Prawn and Lobster have an equal cost savings in...
Press F, a BBB-rated firm, desires a fixed rate, long-term loan. Press F presently has access...
Press F, a BBB-rated firm, desires a fixed rate, long-term loan. Press F presently has access to floating interest rate funds at a margin of 1.42% p.a. over LIBOR. Its direct borrowing cost is 10.47% p.a. in the fixed rate bond market. In contrast, B.D. Energy, which prefers a floating rate loan, has access to fixed rate funds in the Eurodollar bond market at 7.20% p.a. and floating rate funds at LIBOR + 0.29% p.a. Suppose they enter into an...
Company X and Company Y have been offered the following rates Fixed Rate Floating Rate Company...
Company X and Company Y have been offered the following rates Fixed Rate Floating Rate Company X 3.5% 3-month LIBOR plus 10bp Company Y 4.5% 3-month LIBOR plus 30 bp Suppose that Company X borrows fixed and company Y borrows floating. If they enter into a swap with each other where the apparent benefits are shared equally, what is company X’s effective borrowing rate? A. 3-month LIBOR−30bp B. 3.1% C. 3-month LIBOR−10bp D. 3.3%
Consider the borrowing costs faced by the following three companies: Fixed Floating A 5.0% LIBOR+0.6% B...
Consider the borrowing costs faced by the following three companies: Fixed Floating A 5.0% LIBOR+0.6% B 6.0% LIBOR+1.3% C 7.0% LIBOR+2.5% Assume if entering the swap transaction, they split the possible savings equally. A) Company A and B want to engage in the swap transaction. What is the possible combined savings for both companies? B) Suppose company C wants to borrow fixed rate funds. Is it possible for C to reduce its cost of borrowing below 7%, and if so...
Firm B, with a better credit rating, has lower borrowing costs in both types of borrowing....
Firm B, with a better credit rating, has lower borrowing costs in both types of borrowing. Firm A and Firm B face the following rate structure: (3pts)                      Preferred            Fixed             Floating Firm A           Fixed                   8.0%             6-month LIBOR+0.6% Firm B           Floating 6.8%             6-month LIBOR a)  Devise a swap agreement (without a swap bank) such that A and B will share the benefit equally? Compute the after-swap borrowing costs for Firm A and Firm B, and also determine cost savings for both...
Company A desires a variable-rate loan but currently has a better deal from the fixed-rate market...
Company A desires a variable-rate loan but currently has a better deal from the fixed-rate market at a rate of 11%. If Company A borrows from the variable-rate market, the cost would be LIBOR+2%. In contrast, Company B, which prefers a fixed-rate loan, has a better deal from the variable-rate market at LIBOR+3%. If Company B borrows from the fixed-rate market, the cost would be 15%. What is the spread differential between Companies A and B?
Companies X and Y have been offered the following annual interest rates with semi-annual compounding on...
Companies X and Y have been offered the following annual interest rates with semi-annual compounding on $5 million 6-year loans. Company Fixed Rate (%) Floating Rate X 5.00% LIBOR Y 7.00% LIBOR + 1% Company X borrows initially at a fixed rate but would like to have a floating rate loan. Company Y borrows initially at a floating rate but would like a fixed-rate loan. a)    What is the Quality Spread Differential (QSD)? b)    What is the necessary condition for a fixed-for-floating...
An investment company holds $10 million of a 5-year $100 million RST bond in its portfolio....
An investment company holds $10 million of a 5-year $100 million RST bond in its portfolio. The bond pays interest on a fixed rate basis equal to 2.30%. Current 5-year treasury rates are 1.50% and the current 5-year swap spread is 30 basis points. a. To convert the bond payments to a floating rate, the investor should enter into which type of swap and what will be the investor’s net floating rate exposure quoted as a spread to Libor? Be...
ADVERTISEMENT
Need Online Homework Help?

Get Answers For Free
Most questions answered within 1 hours.

Ask a Question
ADVERTISEMENT