Question

1. company B requires a fixed rate loan. Design a swap that will net a bank, acting as intermediary, 0.2% per annum and that will appear equally attractive to both companies. Companies A and B have been offered the following rates per annum on a $10 million five-year loan:

	Fixed Rate	Floating Rate
Company A	5.25%	LIBOR + 0.35%
Company B	6.85%	LIBOR + 1.0%

Company A requires a floating rate loan;

Answer 1

Company	Fixed Rate	Floating rate	Preference
A	5.25%	LIBOR + 0.35%	Floating
B	6.85%	LIBOR + 1%	Fixed
Inter Bank activity
Company	Rates received	Rates payable
A	LIBOR + 0.35%	5.25%
B	6.85%	LIBOR + 1%
Total	LIBOR + 7.20%	LIBOR + 6.25%
Spread avaialble with bank	(LIBOR + 7.20%)-(LIBOR + 6.25%)
Spread available with bank	0.95%
Commission kept by bank	0.20%
Remaining spread	0.75%
Equally distributed in A and B	0.38%
Rates payable by each company
	Paid to Inter-Bank	Spread shared by Inter-bank	Effective rate for each company
A	LIBOR + 0.35%	0.38%	LIBOR -0.025%
B	6.850%	0.38%	6.48%