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A. (2+2+4+2+2 = 12 points) Given the following information: Borrower Fixed rate Floating rate AAA 8.50% p.a. LIBOR BBB 9.20% p.a. LIBOR +0.50% p.a. The
A. (2+2+4+2+2 = 12 points) Given the following information: Borrower Fixed rate Floating rate AAA 8.50% p.a. LIBOR BBB 9.20% p.a. LIBOR +0.50% p.a. The notional principal of the swap agreement is USD 1million. 1. Explain the concept of notional principal. 2. Under the assumption of no intermediationo intermediation fees and an equal split of savings (if any), determine whether a profitable interest rate swap could be arranged between AAA Limited and BBB Limited. Explain your reasoning. 3. If a profitable swap is possible, construct a swap that would advantage both parties. Indicate which party should borrow at a fixed rate using a bond issue and which party should borrow at a floating rate via a bank loan. 4. Discuss whether the two parties have to share any savings equally and what is the impact of considering the presence of an investment bank intermediating this contract on their costs. 5. Under the assumption that the swap is intermediated by an investment bank that requests a 0.10% fee to each of the two parties, determine if a swap can produce cost savings and, if that is true, redesign the swap with these new data
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