Question

Firm B, with a better credit rating, has lower borrowing costs in both types of borrowing....

  1. 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 firms.

b) Suppose that a swap dealer offers the following swap quotes:

  • Firm A pays BigBank 7.20% for LIBOR.
  • Firm B pays BigBank LIBOR for 7.00%.

What is the after-swap cost for each company? What is the profit for the swap dealer and cost savings for Firms A and B?

Homework Answers

Answer #1

Firm A required Fixed, cost is 8.0%

Firm B required floating, cost is 6 month Libor

Total Cost = 8.0% + 6 month LIBOR

Under mutual swap,

A will borrow at floating, Cost is     6-month LIBOR+0.6%

B will borrow fixed, cost is 6.8%

So, total cost = 6 - month LIBOR+ 7.4%

Benefit from swap formula= Total Cost without Swap - Total cost with Swap

=8% + 6 month LIBOR- (6 month LIBOR +7.4%)

= 0.6%

Benefit is shared equally , so benefit to A = 0.3%

Benefit to B = 0.3%

So, Cost to A = Cost of Fixed - savings or benefit of swap

= 8% - 0.3%

= 7.7%

Cost to B = Cost of floating - Swap benefits

= 6 month LIBOR - 0.3%

Cost without swap AfterSwap Cost . Profits. Savings

A. 8% . 7.7% . 0.3% . 0.3%

B. 6 month LIBOR . 6 month LIBOR-0.3%. 0.3% . 0.3%

Know the answer?
Your Answer:

Post as a guest

Your Name:

What's your source?

Earn Coins

Coins can be redeemed for fabulous gifts.

Not the answer you're looking for?
Ask your own homework help question
Similar Questions
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...
Currently, Company FMA has a 5-year floating-rate loan at £ Libor +1% (of £1 million principal),...
Currently, Company FMA has a 5-year floating-rate loan at £ Libor +1% (of £1 million principal), and it is concerned about a possible appreciation in the value of the £ and an increase in interest rate. Current exchange rate, S = 1.8 $/£. (4pts) Suppose that a swap dealer offers the following two swap quotes: FMA pays dealer $ 6.50% for £ Libor%. FMA pays dealer £ Libor% for $ 6.40%. What is the current borrowing cost for Company FMA?...
Apple and Compaq both seek funding at the lowest possible cost. Apple would prefer the flexibility...
Apple and Compaq both seek funding at the lowest possible cost. Apple would prefer the flexibility of floating rate borrowing, while Compaq wants the security of fixed rate borrowing. They face the following interest rate structure: (1) Apple could borrow floating at LIBOR + 1% or borrow fixed at 8%; (2) Apple prefers floating rate debt; (3) Compaq could borrow floating at LIBOR + 2% or borrow fixed at 12%; and (4) Compaq prefers a fixed rate. a. To arrange...
Steelers & Penguins Sports Clubs both seek the lowest financing cost. They face the following rates:...
Steelers & Penguins Sports Clubs both seek the lowest financing cost. They face the following rates:                                                                               Steelers                                      Penguins                 Credit Rating                                                           A                                              BBB Cost of fixed funds                                              4.0%                                           5.5% Cost of floating funds                             6 MO Libor + 1.00%                6 MO Libor + 1.75% If a swap is set up such that any potential savings are divided equally between the two clubs, what will be the net post swap cost for Steelers? a. Libor + 0.625 b. 4.75% c. 3.625% d. Libor – 0.375
Steelers & Penguins Sports Clubs both seek the lowest financing cost. They face the following rates:...
Steelers & Penguins Sports Clubs both seek the lowest financing cost. They face the following rates: Steelers Penguins Credit Rating A BBB Cost of fixed funds 4.0% 5.5% Cost of floating funds 6 MO Libor + 1.00% 6 MO Libor + 1.75% If a swap is set up such that any potential savings are divided equally between the two clubs, what will be the net post swap cost for Steelers? a. Libor – 0.375 b. Libor + 0.625 c. 4.75%...
Steelers & Penguins Sports Clubs both seek the lowest financing cost. They face the following rates:...
Steelers & Penguins Sports Clubs both seek the lowest financing cost. They face the following rates:                                                                               Steelers                                      Penguins                 Credit Rating                                                           A                                              BBB Cost of fixed funds                                              4.0%                                           5.5% Cost of floating funds                             6 MO Libor + 1.00%                6 MO Libor + 1.75% If a swap is set up such that any potential savings are divided equally between the two clubs, what will be the net post swap cost for Penguins? a. Libor + 1.375 b. 5.125% c. 4.75% d. Libor + 1.25
Steelers & Penguins Sports Clubs both seek the lowest financing cost. They face the following rates:...
Steelers & Penguins Sports Clubs both seek the lowest financing cost. They face the following rates: Steelers Penguins Credit Rating A BBB Cost of fixed funds 4.0% 5.5% Cost of floating funds 6 MO Libor + 1.00% 6 MO Libor + 1.75% If a swap is set up such that any potential savings are divided equally between the two clubs, what will be the net post swap cost for Steelers? a. Libor – 0.375 b. 3.625% c. Libor + 0.625...
Question (1) Firm “A” prefers to borrow float-rate while firm “B” prefers to borrow fixed-rate. “A”...
Question (1) Firm “A” prefers to borrow float-rate while firm “B” prefers to borrow fixed-rate. “A” is offered 4.5% fixed rate and LIBOR float rate, while “B” is offered 6% fixed rate and LIBOR+0.5% float rate. If both firms approach you as an MSF elite graduate for a consultation to reduce their borrowing costs, suggest (voluntarily) an interest rate swap structure where “A” benefits 75% of the cost reduction and “B” benefits 25% of the cost reduction. A B Issue...
Steelers & Penguins Sports Clubs both seek the lowest financing cost. They face the following rates:...
Steelers & Penguins Sports Clubs both seek the lowest financing cost. They face the following rates:                                                                              Steelers                                    Penguins                 Credit Rating                                                          A                                            BBB Cost of fixed funds                                             4.0%                                         5.5% Cost of floating funds                            6 MO Libor + 1.00%               6 MO Libor + 1.75% If a swap is set up such that any potential savings are divided equally between the two clubs, what will be the net post swap cost for Steelers?
1) Steelers & Penguins Sports Clubs both seek the lowest financing cost. They face the following...
1) Steelers & Penguins Sports Clubs both seek the lowest financing cost. They face the following rates: Steelers Penguins Credit Rating A BBB Cost of fixed funds 4.0% 5.5% Cost of floating funds 6 MO Libor + 1.00% 6 MO Libor + 1.75% If a swap is set up such that any potential savings are divided equally between the two clubs, what will be the net post swap cost for Steelers? a.Libor – 0.375 b. 4.75% c. 3.625% d. Libor...
ADVERTISEMENT
Need Online Homework Help?

Get Answers For Free
Most questions answered within 1 hours.

Ask a Question
ADVERTISEMENT