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 A B Fixed Rate $ 10.3% $ 8.9% Prime + 1/2% Floating Prime + 1% 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. Show all work.
A) 9%
B) 8.7%
C) 8.9%
D) Prime + 1%
E) None of the above
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Money Banking and Financial Markets
Authors: Stephen Cecchetti, Kermit Schoenholtz
4th edition
007802174X, 978-0078021749
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