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)
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