Company A and B both need to borrow $1 million for a 2-year period.

Company A: a BBB-rated company, would like to borrow at a fixed rate.

Company B: a AAA-rated company, would like to borrow at a floating rate.

Borrower Fixed-rate available Floating-rate available

A: BBB-rated 11.5% LIBOR+1%

B: AAA-rated 10% LIBOR+0.5%

a. Based on the above information, can companies A and B use an interest-rate swap to save their borrowing cost? Explain briefly.

b. What is the total cost savings for the two companies by using an interest rate swap?

c. How can the two companies use a swap contract to split the cost savings equally? Please explain the strategy in detail to get full credits. Assume there is no bank in the middle for the swap contract.