a) Explain what is meant by the "Swap Spread"?

b) Company A wants to borrow $10 million at a 5-year floating rate loan while Company B (a lower credit rated company) wants $10 million at a 5-year fixed rate loan. The companies have been offered the following annual borrowing rates on 10 million 5-year loans:

		Fixed Rate		Floating Rate
Company A		8.50%		LIBOR + 0.75%
Company B		11.00%		LIBOR + 1.5%

. Design a swap for these companies that will share the spread differential equally. Show this is some sort of diagram

(see example below).

? <-------	Company A	<-------- ? .	Company B	--------> ?
		. ? -------->

c) What is the effective rate that each company now pays on its loan?