1. Alpha and Beta Companies can borrow at the following rates.

Alpha Beta

Moody's credit rating Aa Baa

Fixed-rate borrowing cost 8% 11.0%

Floating-rate borrowing cost LIBOR +.25 LIBOR + 1.25%

A. Calculate the Quality Spread Differential (QSD)

B. Develop an interest rate swap in which both Alpha and Beta have an equal cost savings in their borrowing costs. Assume Alpha desires floating-rate debt and Beta desires fixed-rate debt.

C. This time assuming more realistically that a swap bank is involved as an intermediary and the QSD will be divided as 10% for swap bank, 50% for beta and 40% for Alpha. Develop an interest rate swap. Show the final costs for Alpha and Beta.