Company X, a lowrated firm, desires a fixedrate, longterm loan. X presently has access to floating interest rate funds at a margin of 2.25% over LIBOR. Its direct borrowing cost is 12% in the fixedrate bond market. In contrast, company Y, which prefers a floatingrate loan, has access to fixedrate funds in the Eurodollar bond market at 9.5% and floatingrate funds at LIBOR + 1.45%. Suppose that two companies have agreed to enter interest rate swap and that they split the cost savings.

Question A.How much would X pay for its fixed-rate funds?

Answer

%

Question B.How much would Y pay for its floating-rate funds?

(note: please put the +/- sign with your answer)

LIBORAnswer

%