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Investment Solution (IS) and ExpressIT (EIT) both need to borrow $ 100 000 to finance the development of new products. Is can borrow fixed-interest rate
Investment Solution (IS) and ExpressIT (EIT) both need to borrow $ 100 000 to finance the development of new products. Is can borrow fixed-interest rate funds at 9 percent or variable rate funds at the LIBOR plus 1.5% in the debt market. EIT, being less creditworthy, incurs higher costs of borrowing which are a fixed rate of 11 percent and a variable rate of LIBOR plus 2.5%. Design a swap and calculate the amount of saving on the net cost of borrowing if BankCredit offers an interest swap contract with each 15 and EIT, given that BankCredit retains a 20bp between the rates at which it deals equally with them. Label the graph below. Swap Bank Firm Firm EIT IS 99% 7.9% 8.1% LIBOR paid LIBOR received LIBOR 2.5%
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