1. The following table shows the borrowing opportunities for two firms.

	Firm A	Firm B
Fixed rate	11.75 %	9.5%
Floating rate	LIBOR + 0.75%	LIBOR

Firm A can raise the money by issuing 5-year floating-rate notes at LIBOR + 0.75 %. However, Firm A would prefer to borrow at a fixed rate. On the other hand, Firm B is considering issuing 5-year fixed-rate Eurodollar bonds at 9.5 percent. It would make more sense for Firm B to issue floating-rate notes at LIBOR in order to finance floating-rate Eurodollar loans. Finally, the swap bank makes the following offers to both firms.

1. What is the gain for each party: the Swap Bank, Firm A, and Firm B based on the QSD? Show your work. (40points)

2. Firm A and B face the same financing option as the above table. However, the Swap Bank offers a new LIBOR financing as in the table below. That is, the Swap bank provides two firms with LIBOR rate only. If Firm A gains 0.50% from this swap, figure out the ask price for LIBOR. What are the gains for the Swap Bank and Firm B, respectively? Show your work.

U.S. $	Bid	Ask
5 year	10.00 %	( )%