Companies ABC & XYZ can borrow for a three-year term at the following rates:

ABC XYZ

Moody's credit rating Aa Baa

Fixed-rate borrowing cost 9.75% 12.75%

Floating-rate borrowing cost LIBOR+0.25% LIBOR +1.25%

Assume that a swap bank is involved as an intermediary. The swap bank is to give a quote on three-year dollar interest rate swaps against LIBOR flat. What is the lowest Bid the swap bank can quote?

a) 9.50%

b) 11.75%

c) 11.5 %

d) 10.00 %