Ashton Bishop is the debt manager for World Telephone, which needs 3.49 billion Euro financing for its operations. Bishop is considering the choice between issuance of debt denominated in: Euros (), or U.S. dollars, accompanied by a combined interest rate and currency swap. Bishop believes that issuing the U.S.-dollar debt and entering into the swap can lower World's cost of debt by 45 basis points. Immediately after selling the debt issue, World would swap the U.S. dollar payments for Euro payments throughout the maturity of the debt. She assumes a constant currency exchange rate throughout the tenor of the swap. Characteristic Par value Term to maturity Fixed interest rate Interest payment Euro Currency Debt 3.49 billion 3 years 6.25% Annual U.S. Dollar Currency Debt $3 billion 3 years 7.75% Annual Spot currency exchange rate Spot currency exchange rate $1.06 per euro ($1.06/1.00) 5.96% euro/7.46% U.S. dollar b. Enter the notional principal and interest payment cash flows the combined interest rate and currency swap. Year 0 Year 1 Year 2 Year 3 million million billion Cash Flows of the Swap World pays Notional principal Interest payment World receives Notional principal billion billion million million million billion million million billion million Interest payment billion million million c. State whether or not World would reduce its borrowing cost by issuing the debt denominated in U.S. dollars, accompanied by the combined interest rate and currency swap. O Yes O No Alpha and Beta Companies can borrow for a five-year term at the following rates: Moody's credit rating Fixed-rate borrowing cost Floating-rate borrowing cost Alpha 11.48 LIBOR Beta Baa 13.88 LIBOR + 1% Assuming more realistically that a swap bank is involved as an intermediary. Assume the swap bank is quoting five-year dollar interest rate swaps at 12.5-11.7 percent against LIBOR flat. Calculate the quality spread differential (QSD). (Enter your answers as a percent rounded to 1 decimal places.) Quality spread differential 1.4 %