The following table shows the borrowing opportunities for two firms. Fixed rate Floating rate Firm A 11.25 % LIBOR + 0.50% Firm B 9.75% LIBOR Firm A can raise the money by issuing 5-year floating-rate notes at LIBOR + 0.50 %. However, Firm A would prefer to borrow at a fixed rate. On the other hand, Firm B considers issuing 5-year fixed-rate Eurodollar bonds at 9.75 percent. It would make more sense for Firm B to issue floating-rate notes at LIBOR. Finally, the swap bank makes the following offers to both firms.

1. What is the total gain for this swap? In other words, figure out QSD (quality spread differential).
2. Figure out the gain for Firm A and Firm B. and gain for Swap bank.

Interest Rate Swap Swap Bank 93/4% 11 1/2% LIBOR - 1/4% LIBOR + 1% Firm Firm B A Interest Rate Swap Swap Bank 93/4% 11 1/2% LIBOR - 1/4% LIBOR + 1% Firm Firm B A