Company A and Company B can borrow for a ten-year term at the following rates:

company A prefers floating rate and company B prefers fixed rate.

	Company A	Company B
Moodys credit rating	AAA	AA
Fixed rate borrowing cost	7%	11%
Floating rate borrowing cost	LIBOR+1%	LIBOR+4%

a. Calculate the quality spread differential (QSD). (5 marks)

b. Assuming that Swap Bank desires to earn _____(please refer to Table 1 as shown below), compute the potential cost saving for each company A and B, if the ratio to divide the balanced cost saving is .(5 marks)

c. What are the effective cost savings for A and B.? (5 marks)

4. Show the transactions designed for A by the Swap Bank for A to achieve its desired effective cost of borrowing. (5 marks)

5. Show the transactions designed for B by the Swap Bank for A to achieve its desired effective cost of borrowing.(5 marks)

(Note that: Please provide detailed transactions for each of the three counter parties with an illustration chart.)

TABLE1

RATIO FOR SHARED BENEFIT BETWEEEN A AND B		SWAP BANK'S BENEFIT
A	B
7	7	0.20%