1. The Star Chemical Company wants to raise $500 million with a 5-year loan to finance an expansion of one of its production plants. Based on its moderate credit ratings, Star can borrow 5-year funds at a 5.5% fixed rate or at a floating rate equal to LIBOR + 150 BP. Given the choice of financing, Star prefers the fixed-rate loan. The Moon Development Company is also looking for 5-year funding to finance its proposed $500 million office park development. Given its high credit rating, suppose Moon can borrow the funds for 5 years at a fixed rate of 4.5% or at a floating rate equal to the LIBOR + 100 BP. Given the choice, Moon prefers a floating-rate loan. In summary, Star and Moon have the following fixed and floating rate loan alternatives:

Company	Fixed Rate	Floating Rate
Star Company Moon Company	5.5% 4.5%	LIBOR + 150 BP LIBOR + 100 BP

Questions:

1. Describe each companys comparative advantage?

2. What are the total possible interest rate reduction gains for both parties if both parties were to create synthetic positions with a swap?

3. Explain how a swap bank could arrange a five-year, 3.75%/LIBOR a swap that would benefit both the Star and Moon companies.