QUESTION 4

AAA Corporation and BBB Corporation are going to borrow $10 million and are facing the following rates. Assume that AAA Corporation wants floating rate and BBB Corporation wants fixed rate:

	Fixed	Floating
AAA Corp	4.00%	LIBOR - 0.1%
BBB Corp	5.20%	LIBOR + 0.6%

Required:

1. Briefly explain the swap benefit for both companies. (2 marks)
2. Draw the diagram for the swapping without financial institution involved involvement. (8 marks)