Smith Ltd and Jones Ltd are two companies that can borrow for a three year term at the following rates. Smith Jones International credit rating AA BB 13% Fixed-rate borrowing cost 8.5% Floating-rate borrowing cost LIBOR LIBOR + .5% For this question, you MUST enter percent signs where necessary. (i) Calculate the quality spread differential (QSD). Enter your answer as a percentage to two decimal places. (1 mark)

(ii) Assume that Smith desires floating-rate debt and Jones desires fixed-rate debt. No swap bank is involved in the transaction. All transactions are against flat Libor. The QSD is shared 75% to Smith and 25% to Jones. (6 Marks) Fill in the blanks etc. Enter answers as one of the following formats. Numbers should be percentages to two decimal places. e.g. LIBOR, LIBOR + 1.23%, 9.50% etc

Smith needs to issue_________ rate debt at ___________and Jones needs to issue________rate debt at ___________

Smith needs to pay ________ to Jones. Jones needs to pay_________to Smith.

If this is done, Smith's all-in cost is ________ Jones's fixed-rate all-in cost is ________ (1 mark each)

(iii) Assume that Smith desires floating-rate debt and Jones desires fixed-rate debt. No swap bank is involved in the transaction. All transactions are against flat Libor. SmithSmith with the better credit rating will save 50% of the QSD and Jones 50%.

Smith needs to pay ____________ to Jones Jones needs to pay to __________ Smith (half mark each)

If this is done, Smith's all-in cost is _____________ Jones's fixed-rate all-in cost is_______________ (1 Mark each)

Smith Ltd and Jones Ltd are two companies that can borrow for a three year term at the following rates. Smith Jones International credit rating AA BB Fixed-rate borrowing cost 8.5% 13% Floating-rate borrowing cost LIBOR LIBOR + .5% For this question, you MUST enter percent signs where necessary. (i) Calculate the quality spread differential (QSD). Enter your answer as a percentage to two decimal places. (1 mark) (ii) Assume that Smith desires floating-rate debt and Jones desires fixed-rate debt. No swap bank is involved in the transaction. All transactions are against flat Libor. The QSD is shared 75% to Smith and 25% to Jones. (6 Marks) Fill in the blanks etc. Enter answers as one of the following formats. Numbers should be percentages to two decimal places. e.g. LIBOR, LIBOR + 1.23%, 9.50% etc Smith needs to issue + rate debt at + and Jones needs to issue rate debt at + (.5 mark each) Smith needs to pay to Jones