Homelea Ltd is a public company that wishes to borrow at a fixed rate. Scraper Ltd is a public corporation that is quite happy to borrow at a floating rate. The interest rates that would be charged to both organisations are provided in the following schedule:

Homelea Ltd

Floating 12.5%

Fixed 10%

Scraper Ltd

Floating 12.0%

Fixed 8%

Scraper faces lower interest rate under both forms of borrowing; however, the management of both organisations believe they can enter and interest rate swap agreement that both will benefit from. They agree to share any interest savings equally.

a) What is the interest rate saving that is available

b) Describe the interest rate swap arrangement the firms should entre into

c) Complete the following schedule:

Scraper ltd

Swap intrest rate payments -

Swap intrest rate receipts -

Intrest Cost -

Intrest savings -

Homelea Ltd

Swap intrest rate payments -

Swap intrest rate receipts -

Intrest Cost -

Intrest savings -