Question
Company A is an AAA-rated firm. It has invested $10,000,000 in a 10-year project which generates floating rate returns for 10 years. Company A finds
Company A is an AAA-rated firm. It has invested $10,000,000 in a 10-year project which generates floating rate returns for 10 years. Company A finds that it can issue 10-year fixed-rated Eurodollar bonds at 10% or issue FRNs at LIBOR to finance the investment. Company B is an A-rated firm that has also invested $10,000,000 in a 10-year project, but Company B's project generates fixed rate returns for 10 years. Company B finds that it can issue 10-year fixed rated Eurodollar bonds at 11.5% or issue FRNs at LIBOR + 0.75% to finance the investment. If a swap bank quotes a 10-year US$ swap at 10.25-10.50 against LIBOR, what is the cost savings in Company A's borrowing cost? a. 0.30% b. All of the answers here are incorrect c. 0.50% d. 0.75%
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