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.

1. 9%
2. 8.7%
3. 8.9%
4. Prime + 1%
5. None of the above