Question 2 Total 10 marks

Alpha and Beta Companies can borrow for a five-year term at the following rates:

AlphaBeta

Fixed-rate borrowing cost10%12.0%

Floating-rate borrowing costLIBORLIBOR + 1%

Required:

a. Calculate the quality spread differential (QSD). (3 marks)

b. Develop an interest rate swap in which both Alpha and Beta have an equal cost savings in their borrowing costs. Assume Alpha desires floating-rate debt and Beta desires fixed-rate debt.No swap bank is involved in this transaction. (7 marks)