A public utility has a relatively low credit (BBB) rating. It would like to match its long- term assets with long-term, fixed-rate debt, but it finds long-term, fixed-rate funding expensive. An oil company has as a higher (AA) credit rating. It can issue fixed-rate debt at a low cost, but prefers to issue short-term commercial paper to fund its credit card receivables. The Treasurers of the two companies know one another and agree to do the swap without using a bank as an intermediary The public utility (BBB) can borrow in the bond market at 6.5% and can obtain a floating-rate loan from its bank that reprices annually at SOFR+0.50%. (SOFR is the Secured Overnight Financing Rate the new benchmark interest rate for dollar-based lending.) The oil company (AA) can issue bonds at 4.85% or issue A1/P1-rated commercial paper at 5 basis points below SOFOR (at SOFR 0.05%).

1. Set up a possible swap between these two firms. Show the potential gains, if any, to each party from the swap.