QUESTION # 3

Suppose that Company A and Company B wants to borrow USD 10 million for 10 years. Company A prefers to borrow at floating rate of interest, while Company B has a preference to borrow at fixed rate of interest. Suppose that in debt market banks offer Company A an 8% fixed or floating rate of LIBOR+1%. The quotes of the banks for Company B are fixed rate of 9.5% or floating rate of LIBOR+0.5%. If swap dealer makes 0.5%

1. What is the notional amount?
2. What interest rate (and amount) Company A will pay to its bank?
3. What interest rate (and amount) Company B will pay to its bank?
4. Construct interest rate swaps involving all parties.
5. How many swap contracts will you construct?
6. What net interest rate Company A pays to the Swap Dealer?
7. What net interest rate Company B pays to the Swap Dealer?
8. Compute the net gains (or net interest paid) by Company A through swap contract?
9. Compute the net gains (or net interest paid) by Company B through swap contract?

QUESTION # 5

Suppose that AAA Corp and BBB Corp are two companies who want to borrow USD 100 million for 10 years. AAA Corp prefers to borrow at fixed rate of interest, while BBB Corp has a preference to borrow at floating rate of interest. Suppose that in debt market (banks) offer the followings to AAA Corp and BBB Corp:

Companies

Quotes

Floating

Fixed

AAA Corp

Prime + 1%

10.5%

BBB Corp

Prime + 2%

9.5%

1.Construct the interest rate swaps involving a swap dealer and debt market.

2.Compute the net gains (or net interest paid) for each party involved in swap contracts?

3.What will be total gain from the all the swap contracts in this question?