Consider a plain vanilla interest rate swap. Firm A can borrow at 8% fixed or can borrow floating at LIBOR. Firm B is somewhat less creditworthy and can borrow at 10% fixed or can borrow floating at LIBOR + 1%. Firm A wants to borrow floating and Firm B prefers to borrow fixed. Both corporations wish to borrow $10 million for 5 years. Which of the following swaps is mutually beneficial to each party and meets their financing needs?

A) Firm A borrows $10 million externally for 5 years at LIBOR; agrees to swap LIBOR to firm B for 8 12 % fixed for 5 years on a notational principal of $5 million; B borrows $10 million externally at 10%.

B) A borrows $10 million externally for 5 years at LIBOR; agrees to pay 812% to B for LIBOR fixed for 5 years on a notational principal of $5 million; B borrows $10 million externally at 10%.

C) Since the QSD = 0 there is no mutually beneficial swap.

D) A borrows $10 million externally at 8% fixed for 5 years; agrees to swap LIBOR to B for 812% fixed for 5 years on a notational principal of $5 million; B borrows $10 million externally at LIBOR + 1%.