1. ] Companies AAA and BBB are offered the following rates per annum on a $5 million 10-year loan. AAA requires a fixed-rate loan while BBB requires a floating-rate loan. Bank of America (BOA) is planning to arrange a fixed-for-LIBOR (= R% & LIBOR exchange) swap with a 20-basis-point spread, which will appear equally attractive to AAA and BBB.

	Fixed Rate	Floating Rate
AAA	5%	LIBOR+0.5%
BBB	6%	LIBOR-0.5%

1. Total gain of the swap is: (6% - 5%) (-0.5-0.5) = 2%

2. The net gain of the swap to each company without the F.I. is:

AAA = 2%/2 = 1% BBB = 2%/2 = 1%

3. The net gain of the swap to each company with the F.I. is:

With financial institution the make a loss

AAA= 1% - 1 = 0%

4. The swap rate that is equally attractive to each company without the F.I. is:

AAA under swap = -5 +R L = -(l+0.

5. The transactions of interest rates that AAA pays to or receives from BOA under the swap are:

(Show % with Pay and Receive)

6. The transactions of interest rates that BBB pays to or receives from BOA under the swap are:

(Show % with Pay and Receive)

7. What is the transformed rate of loan as the net effect of the swap to AAA with the F.I.?

8. What is the transformed rate of loan as the net effect of the swap to BBB with the F.I.?