Consider two corporations A and B. A, a high quality borrower, wishes to raise $50 million in
Question:
Consider two corporations A and B. A, a high quality borrower, wishes to raise $50 million in five year floating rate funding. The company can borrow fixed rate at 5% and floating rate at Libor - 0.5%. B, a lower rated company, wishes to raise $50 million in fiv year fixed rate funding. B finds it can borrow fixed at 7% and floating at Libor +0.5%.
Suppose A borrows at the fixed rate; B at the floating rate and they both enter into a swap, whereby A pays B the Libor and receives a fixed rate of 7% - y.
(A) if y = 1.25% what are the net borrowing costs for A and B?
(B) (True/False) A and B would be better off, if they do not use swaps. Justify
(C) In case they decide to go with the above swap, what value of y will be more agreeable for both A and B?
Expert Answer:
A To calculate the net borrowing costs for A and B we need to consider the interest payments and the ... View the full answer
