Macrosoft Company and Pear Company need to raise funds to pay for capital improvements at their manufacturing plants. Macrosoft is a well-established firm with an excellent credit rating in the debt market; it can borrow funds either at 11% fixed rate or at LIBOR + 1% floating rate. Pear is a fledgling start-up firm without a strong credit history. It can borrow funds either at 10% fixed rate or at LIBOR + 3% floating rate. Both firms are indifferent regarding fixed or floating rates.

1. a) Is there an opportunity here for Macrosoft and Pear to benefit by means of an interest rate swap? Why?
2. b) Suppose youve just been hired at a bank that acts as a dealer in the swaps market, and your boss has shown you the borrowing rate information for your clients Macrosoft and Pear.
   • Describe how you could bring these companies together in an interest rate swap that would make both firms better off while netting your bank a 2% profit.
   • Draw a diagram of cash flows between firms, the Swap bank and the debt market.
   • In this case, is the swap bank assuming any risk? Are any of the firms assuming any risk?
   • Could you create a similar contract if your boss requires that you get a 4% profit? Explain.