Question
Consider the following borrowing rates for companies A and B: Fixed Floating A 8.75% LIBOR B 10% LIBOR+1% Company A is borrowing at the fixed
Consider the following borrowing rates for companies A and B:
Fixed Floating
A 8.75% LIBOR
B 10% LIBOR+1%
Company A is borrowing at the fixed rate while Company B is borrowing at the floating rate. But, Company A would like to finance an interest rate sensitive asset while B would like to finance an interest rate insensitive asset. Design an interest rate swap agreement that would net 0.05% for the swap bank and would net 20% and 60% of the swap spread for company A and B respectively.
a) Show explicitly which party pays what rate to whom, by skeching the figure and state the final effective rates for companies A and B.
b) Calculate the annual payoff for all of the parties if the notional amount is $20,000,000.
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