Company A, a low-rated firm, desires a fixed-rate, long-term loan. Company A currently has access to floating interest rate funds at LIBOR+1.25% and its direct borrowing cost is 10.25% in the fixed-rate bond market. In contrast, company Z, which prefers a floating-rate loan, has access to fixed-rate funds in the Eurodollar bond market at 8.75% and floating-rate funds at LIBOR+0.75%.

If the companies were to enter into an interest rate swap, what are the maximum possible savings (i.e. the Quality Spread Differential)?

Group of answer choices

1.00%

1.50%

0.75%

0.50%