AAA Corp is more creditworthy than BBB Corp and thus is able to borrow money in capital markets at lower rates than BBB Corp. In fixed rate markets AAA has a 120 basis point advantage over BBB; in variable rate markets a 50 basis point advantage over BBB. Borrowing Rates Available in Capital Markets for ABC and for XYZ Fixed Rates Floating Rates 4.00 Percent Six-month LIBOR - 10 bpts 5.20 Percent Six-month LIBOR + 60 bpts AAA CORPORATION BBB CORPORATION AAA desires variable rate financing and BBB desires fixed rate financing. The bank that you work for has approached both of these firms and proposed an interest rate swap. A diagram of this proposal is shown below. 4.00 Percent 4.33 Percent 4.37 Percent LIBOR + 60 bpts AAA Bank BBB LIBOR LIBOR 1. What is the net cost of borrowing for AAA Corp? Answer: -33 basis points 2. What is the net cost of borrowing for BBB Corp? Answer: 4.97% 3. What is the banks profit or loss from this swap deal? Answer: 4 basis points