IBM and GE are both in the market for approximately $$10$ million of debt for a five year$-$period. GE has an AA

credit rating while IBM has a single A rating. GE has access to both fixed and floating interest rate debt at

attractive rates. However, GE would prefer to borrow at floating rates. Although IBM can borrow at both

interest rates, the fixed rate debt is considered expensive. IBM would prefer to borrow at fixed rates. The

information about the two firms is summarized as follows:

Based on the information provided, the two parties arrange an interest swap so that they split the total

saving evenly. No financial institution is needed. In such a swap,

GE pays LIBOR; IBM pays $9\%$

GE pays $8\mathrm{.}75\%$; IBM pays LIBOR

GE pays $9\%,$ IBM pays LIBOR

GE pays LIBOR; IBM pays $8\mathrm{.}75\%$