Question
Suppose two firms have received quotes for fixed rate and floating rate loans. Firm A can borrow at 5.00% fixed or LIBOR + 0.50% whereas
Suppose two firms have received quotes for fixed rate and floating rate loans. Firm A can borrow at 5.00% fixed or LIBOR + 0.50% whereas Firm B can borrow at 6.50% fixed or LIBOR + 1.20%. Assuming a financial intermediary would charge a 0.08% fee that would be split evenly and that Firm A would receive 50.00% of the surplus (after fees) and that Firm B would receive the remaining 50.00% of the surplus (after fees), what would Firm A's effective borrowing rate be after entering into the swap contract assuming their preference is to have a floating interest rate?
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