Question
Question 4. [3 marks] Two companies have investments which pay the following rates of interest: Fixed Float Firm A 6% Libor Firm B 8% Libor+0.5%
Question 4. [3 marks]
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. Show how these two firms can both benefit by entering into a swap agreement. If an intermediary charge both parties equally a 0.1% fee (intermediary changes 0.2% in total) and any benefits are spread equally between Firm A and Firm B, what rates could A and B receive on their preferred interest rate? (2 marks) Please draw the cash flow chart. (1 marks)
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