Question
Companies A and B face the following interest rates:A BFloating rate LIBOR + 0.5% LIBOR + 2.0%Fixed rate 4.00% 7.50%Assume that A wants to borrow
Companies A and B face the following interest rates:A BFloating rate LIBOR + 0.5% LIBOR + 2.0%Fixed rate 4.00% 7.50%Assume that A wants to borrow at a floating rate of interest and B wants to borrow at a fixed rate of interest.
a. Explain why the companies may wish to enter into an interest rate swap agreement. (2 marks)
b. What is the total gain from using a swap? (1 mark)c. Assume that the companies enter into a swap agreement, and the gains are split 50/50. If there is nofinancial institution involved, whatwill be the terms of the swap? (i.e. What will each company receiveand pay?) (3 marks)
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