Alpha and Beta Companies can borrow for a five$-$year term at the following rates:

Alpha Beta

Moody$$s credit rating Aa Baa

Fixed$-$rate borrowing cost $12\mathrm{.}5\%16\mathrm{.}0\%$

Floating$-$rate borrowing cost SOFR$+0\mathrm{.}72\%$ SOFR$+1\mathrm{.}72\%$

Required:

a$.$ Calculate the quality spread differential $($QSD$).$

b$-1.$ 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. No swap bank is involved in this transaction. What rate should Alpha pay to Beta?

b$-2.$ What rate will Beta pay to Alpha?

b$-3.$ Calculate the all$-$in$-$cost of borrowing for Alpha and Beta, respectively.