Question
Citibank is able to borrow fixed at 4% and variable at Libor while Natwest can borrow fixed at 4.5% and variable at Libor + 0.2%.
Citibank is able to borrow fixed at 4% and variable at Libor while Natwest can borrow fixed at 4.5% and variable at Libor + 0.2%. The swap bank is quoting five-year dollar interest rate swaps at 4.1 – 4.2 percent against LIBOR.
a. What is the net gain (in percentage) to Citibank?
b. Calculate the quality spread differential (QSD).
c. Do you think the QSD was split fairly? Why or why not?
d. Why might these firms choose to use a swap bank rather than swap directly?
Step by Step Solution
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1 Net gain to Citibank 4 Libor 02 41 42 4 Libor 02 01 37 Libor 02 2 ...
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Corporate Finance A Focused Approach
Authors: Michael C. Ehrhardt, Eugene F. Brigham
4th Edition
1439078084, 978-1439078082
