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Question 4 7 points Save Answer A financial institution has brought together two firms who seek access to new debt capital for expansions of their operations. Company AAA is concerned about rising interest rates and seeks fixed rate financing, while company BBB is prepared to take what it believes to be the attractive current variable rate which is on offer. The two firms have existing arrangements in place for sources of financing, however AAA can attract funds from the Eurodollar market at what it believes to be beneficial rates. AAA: Fixed: 7% AAA: Floating: LIBOR+3.5% BBB: Fixed: 9% BBB: Floating: LIBOR+6.5% (a) Assuming no transaction costs, clearly indicate the size of any observed mispricing of risk. (1 mark) (b) Clearly indicate any absolute advantage in financing. Why is this likely to be the case? (1 mark) (c) Clearly indicate any comparative advantages in financing. (1 mark)