Both Svkt. Kl. lnfra (KLI) and lpoh lndustries Bhd (IIB) are in the market tor a RM 3% million year loan. Both companies have the same credit rating and have been offered the following rates, for 5 year (balloon payment of principal) loan.

KLI IIB

Fixed : 12.5% 12.5%

Floating : 3-month KLIBOR +2.00% 3-month KLIBOR +2.75%

Preferred Loan : Fixed Floating

You work for Kl. Merchant Bankers (KLMB), and think that the quoted rates are arbitrage able by means of an Interest Rate Swap. Design a fixed-for-oating swap. Show the percentage gain to each party assuming the mispricing' is split equally among the 3 parties.