Question
4.Alpha company can borrow at a fixed rate of 11% and a floating rate of Prime + 20 basis points. Beta company can borrow at
4.Alpha company can borrow at a fixed rate of 11% and a floating rate of Prime + 20 basis points. Beta company can borrow at a fixed rate of 11.8% and a floating rate of Prime + 50 basis points. Alpha prefers to borrow floating rate loan while Beta prefers to borrow fixed rate loan.
a.If there is no middle party involved, what is the total saving that can be shared between Alpha and Beta if they carry out a swap arrangement?
b.If the swap arrangement involves Alpha paying Beta (Prime + 20 b.p.) in exchange for a fixed rate of 11.3%,
i)what is the cost of borrowing floating rate loan for Alpha after the swap?
ii)what is the cost of borrowing fixed rate loan for Beta after the swap?
iii)what are the cost savings for Alpha and Beta after the swap?
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