Question
Company AA and company BB each need $1 million in funds and are quoted the following rates in the fixed and floating markets. AA agrees
Company AA and company BB each need $1 million in funds and are quoted the following rates in the fixed and floating markets. AA agrees to borrow at the fixed-rate and BB agrees to borrow at the floating-rate. Show all calculations.
Debt market | AA | BB |
Fixed rate funds | 5.4% | 6.4% |
Variable rate funds | BBSW + 2% | BBSW + 2.2% |
Required:
a) Structure a swap which allows the two companies to share the differential benefit equally. (8 marks)
b) What fixed rate would AA receive from BB if they negotiated to receive 75% share of the differential? (2 marks)
c) Why would a swap be arranged even if the differential is zero. (3 marks)
d) List and briefly explain the three basic types of swaps. (6 marks)
Step by Step Solution
There are 3 Steps involved in it
Step: 1
![blur-text-image](https://dsd5zvtm8ll6.cloudfront.net/includes/images/document_product_info/blur-text-image.webp)
Get Instant Access with AI-Powered Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
![blur-text-image](https://dsd5zvtm8ll6.cloudfront.net/includes/images/document_product_info/blur-subtext-image.webp)
Step: 3
![blur-text-image](https://dsd5zvtm8ll6.cloudfront.net/includes/images/document_product_info/blur-subtext-image.webp)
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started