Question
Suppose that we have to companies, AAACorp and BBBCorp. AAACorps credit rating is much better than BBBCorp, and both companies would like to borrow $10
Suppose that we have to companies, AAACorp and BBBCorp. AAACorps credit rating is much better than BBBCorp, and both companies would like to borrow $10 million for 5 years. They have been offered the following rates for fixed rate and floating rate loans: Company Fixed Floating AAACorp 4.0% 6-month LIBOR - 0.1% BBBCorp 5.2% 6-month LIBOR + 0.6% Assume that AAACorp would like to borrow at the floating rate, whereas BBBCorp would like to borrow at the fixed rate. What would happen if the two companies get into a swap agreement in which AAACorp agrees to pay BBBCorp at the 6-month LIBOR rate, while BBBCorp agrees to pay AAACorp a fixed rate of 4.35% on $10 million principal?
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