Problem 1 (Points 6) Companies A and B have been offered the following rates per annum for a 10-year loan: Fixed Rate Floating Rate Company A 2.2% LIBOR+0.3% Company B 3.8% LIBOR+0.8% Company A wants to borrow at floating rate and company B wants to borrow at fixed rate. (a). Who has comparative advantage in borrowing in fixed rate market? and who has comparative advantage in borrowing in floating rate market? (1 points) (b). To take the comparative advantage, which company should borrow in the fixed market and which company should borrow in the floating market ? (1 points) (c) To take the comparative advantage, one company enters a swap with a bank to receive LIBOR and pay fixed rate, the other company enters into another swap with the same bank to pay fixed rate and receive LIBOR. Suppose the bank will have a net gain 50 basis through those two swaps and the company B will effectively borrow at a fixed rate of 3.5% through his swap with the bank. Please find the interest rates in the place of question marks in the following cash-flow diagram. The direction of the arrow is the direction of the cash flow? (4 points) (1) ? (3)? (4)? Company A Bank Company B LIBOR LIBOR (1) (2) (3) (4)