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1. Companies A and B have been offered the following rates per annum on a $20 million five- year loan: Fixed rate Floating rate Company

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1. Companies A and B have been offered the following rates per annum on a $20 million five- year loan: Fixed rate Floating rate Company A 12.0% LIBOR+0.1% Company B 13.4% LIBOR+0.6% Company A requires a floating-rate loan; company B requires a fixed-rate loan. Design a swap that will net a bank, acting as intermediary, 0.1% per annum and that will appear equally attractive to both companies. a. Why does company A requires a floating rate loan? b. c. Which market should company A borrow from (i.e., A has comparative advantage)? What is the rate? d. Which market should company B borrow from (i.e., B has comparative advantage)? What is the rate? e. Show your final design

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