Question Four

Two companies with different credit ratings are quoted the following interest rates:

	Fixed Interest Rate	Floating Interest Rate
Company A	8%	BB Rate + 0.5%
Company B	10%	BB Rate + 1%
	2%	0.5%

For internal reasons, Company B has decided that it would like to borrow at a fixed interest rate and Company A has decided that they want to borrow at a floating rate. The CFO of Company A identifies that there may be an opportunity for the two companies to benefit by engaging in an interest rate swap.

Demonstrate how an interest rate swap could be implemented by the two companies above, assuming they have agreed to equally share the cost saving.