Company AAA and Company BBB are both seek funding at the lowest possible cost. They face the following rate structures:

	Company AAA	Company BBB
Cost of fixed-rate borrowing	10.00%	13.00%
Cost of floating-rate borrowing	LIBOR+0.50%	LIBOR+1.00%

1. In what type of borrowing does Company AAA have a comparative advantage? Why?

2. In what type of borrowing does Company BBB have a comparative advantage? Why?

3. If an interest rate swap were arranged between the two firms, what would be the maximum savings?

4. Briefly explain why interest rate swaps are used. Why are they useful?

5. Illustrate an interest rate swap that would generate savings divided equally between the two firms.