TM Net has a high credit rating. It can borrow at a fixed rate of 10% or a variable interest rate of KLIBOR + 0.3%. But TM Net prefer a variable rate due to internal forecast as well the market condition of telecommunication industry in Malaysia.

Yes has a lower credit rating. It can borrow at a fixed rate of 11% or a variable rate of KLIBOR + 0.5%. It would like to borrow at a fixed rate due to the company current market share of telecommunication.

1. Determine which rate should borrow (at fixed or variable) for both TM Net and Yes. [2 Marks]
2. Using the principle of comparative advantage, calculate: The total interest rate both party pay according to their preference type of loan. [3 Marks]
3. The total interest rate both party pay according to comparative advantage rate. [3 Marks]
4. The saving if both parties borrow according to comparative advantage rate. [3 Marks]
5. Based on the above example, for Quality Swap: Highlight the principles should be taken by both the higher and lower credit rating borrowers. [4 Marks]
6. Conclude the benefits which could be derive from both the positive and negative GAP firms respectively.