Question

Assume Gemini Industries can obtain a fixed rate loan at 5.5% or a floating rate loan...

Assume Gemini Industries can obtain a fixed rate loan at 5.5% or a floating rate loan at Libor + 1.25%. Further assume Vader Whinery Inc can get a fixed-rate loan at 6.8% or a floating rate loan at Libor + 1.95%. What is the QSD for the loans?

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Answer #1

QSD = Fixed-rate debt premium differential - Floating-rate debt premium differential

floating rate fixed rate
gemini industries 1.25 5.5
vader whinery inc 1.95 6.8

Company GEMINI INDUSTRIES 1.25 percent rate on the floating-rate debt compares to a 1.95 percent rate obtained for Company VADER WHINERY INC on floating-rate debt ,so this quality spread is(1.95-1.25) .70 percent. For a rate debt, Company GEMINI INDUSTRIES pays 5.5 percent where Company VADER WHINERY INC pays 6.8 percent, so the quality spread is(6.8-5.5) 1.3 percent. The key is to use similar products in the quality spread calculation in order to compare rates of similar issues.

Therefore, this would be 1.3 percent minus .70 percent, resulting in a QSD of .60 percent

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