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11. Interest rate swap (14 points) The following questions are based on the case provided below: Able Inc. and Baker Inc. face the following borrowing
11. Interest rate swap (14 points) The following questions are based on the case provided below: Able Inc. and Baker Inc. face the following borrowing costs in the fixed and floating rate markets: Each firm desires the rate other than that for which it has comparative advantage. A dealer stands ready to enter into a swap as either a fixed-rate payer or floating-rate receiver (or vice versa). The dealer will pay a fixed 4.5% against LIBOR or receive 5.5% against LIBOR. Assume that each firm borrows in the market in which it has comparative advantage and enters into a swap agreement. Analyze the potential gains from swapping for all parties under the following headlines: a. What does the swap dealer earn? b. Is Able better off from the swap? List all loans Able deals with. c. By how much is Baker better-off from the swap agreement? d. What is the overall benefit for the three parties: Able, Baker and the Dealer
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