Bank A is

AAA-rated international bank located in the United Kingdom. The bank needs $500,000,000 to

finance floating-rate Eurodollar term loans to its clients. It is considering issuing five-year floating-rate notes

indexed to LIBOR. Alternatively, the bank could issue five-year fixed-rate Eurodollar bonds at 7 percent.

1)

Which issuance rate would make the most sense for the bank: issuing the fixed or floating?

Circle Answers:

a)

Company B is a BBB-rated U.S. company. It needs $500,000,000 to finance a capital expenditure with a five-

year economic life. It can issue five-year fixed-rate bonds at a rate of 9.25 percent in the U.S. bond market.

Alternatively, it can issue five-year FRNs at LIBOR plus .50 percent.

2)

Which issuance rate would make the most sense for the company: issuing the fixed or floating?

Circle Answers:

a)

A swap bank familiar with the financing needs of Bank A and Company B has the opportunity to set up a fixed-

for-floating interest rate swap that will benefit each counterparty and the swap bank. Assume that the swap

bank is quoting five-year U.S. dollar interest rate swaps at 7.50-7.70 percent against LIBOR flat. The key, or

necessary condition, giving rise to the swap is that the Quality Spread Differential exists:

3)

Does QSD exist? Yes or no.____Yes, is the answer here

4)

If yes, what is it? If no, put '0' in the blank (aka don't put 0). __________________

a

Fixed or Floating b) LIBOR or 7%

Fixed or Floating b) LIBOR + 0.5% or 9.25%

Given your answers to 1,2, 3 and 4: