Alpha and Beta Companies can borrow for a fiveyear term at the following rates

	Alpha	Beta
MOODYS CREDIT RATING	Aa	Baa
FIXEDRATE BORROWING COST	10.5%	12.0%
FLOATINGRATE BORROWING COST	LIBOR	LIBOR + 1%

a) Calculate the quality spread differential (QSD). Describe an interest rate swap in which both Alpha and Beta have an equal cost savings in their borrowing costs. Assume Alpha desires floatingrate debt and Beta desires fixedrate debt. Assume no swap bank is involved.

b) Repeat the above assuming that a swap bank is involved as an intermediary. Assume the swap bank is quoting fiveyear dollar interest rate swaps at 10.710.8 percent against LIBOR flat.