(a) Craig and Ben are two companies that can borrow for a five year term at the following rates.

	Craig	Ben
International credit rating	AAA	A
Fixed-rate borrowing cost	7%	9.0%
Floating-rate borrowing cost	LIBOR	LIBOR + 1%

(i) Calculate the quality spread differential (QSD).

Enter your answer as a percentage to 2 decimal places, e.g. 1.23 (2 Mark)

_____________ %

(ii) Develop an interest-rate swap in which both Craig and Ben have an equal cost savings in their borrowing costs. Assume that Craig desires floating-rate debt and Ben desires fixed-rate debt. No swap bank is involved in the transaction. Assume that the payments are all made against flat Libor. Assume that Libor is currently 4%. (6 Marks)

Fill in the blanks. Enter answers as one of the following formats. Numbers should be percentages to 2 decimal places, e.g. 1.23, LIBOR, LIBOR + 1.23

Craig would borrow at a rate of ______________ % from their bank.

Ben would borrow at a rate of _________________% from their bank.

Craig will pay_______________LIBOR7.5% to Ben.

Ben will pay _____________7.5%LIBOR to Craig.

Craig's all in cost is ______________%

Ben's all in cost is _____________ %

(iii) Based on the information above suppose a swap bank is offering the following quote on USD Libor 7.8 7.9

Under this scenario Craig will pay __________LIBOR7.8%7.9% to the swap bank and Ben will pay AnswerLIBOR7.8%7.9%. (4 marks)

Based on this calculate the gain (in basis points) for:

Swap Bank - ____________bps (1 mark)

Craig - _______________ bps (1 mark)

Ben - ________________ bps (1 mark)