Question
Kindly explain me the following question with a well labelled diagram showing all the interest rate flows corectly and the appropriate calculations. Two companies have
Kindly explain me the following question with a well labelled diagram showing all the interest rate flows corectly and the appropriate calculations.
Two companies have investments which pay the following rates of interest:
Fixed | Float | |
Firm a | 6% | Libor |
Firm b | 8% | Libor+0.5% |
Assume A prefers a fixed rate and B prefers a floating rate. If an intermediary charges both parties equally a 0.1% fee and any benefits are spread equally between Firm A and Firm B. If an intermediary charges both parties equally a 0.1% fee and any benefits are spread equally between Firm A and Firm B, what rates could A and B receive on their preferred interest rate? Show all working.
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