Question
Consider the borrowing rates for Parties A and B. A wants to finance a $100,000,000 project at a fixed rate. B wants to finance a
Consider the borrowing rates for Parties A and B. A wants to finance a $100,000,000 project at a fixed rate. B wants to finance a $100,000,000 project at a floating rate. Both firms want the same maturity, 5 years.
Firm | Fixed Rate |
| Floating | ||||
A | $ | 10.3 | % |
|
| Prime + 1% |
|
B | $ | 8.9 | % |
|
| Prime + 1/2% |
|
Construct a mutually beneficial interest only swap that makes money for A, B, and the swap bank in equal measure. Assume that Party B pays prime rate to swap bank while the swap bank pays prime rate to party A. In that situation, what rate should the swap bank pay to Party B.
- 9%
- 8.7%
- 8.9%
- Prime + 1%
- None of the above
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