Two companies, ANX and AZE, consider borrowing funds for two years. They have access to borrowing for two years as specified in the table below.

Company	Fixed Borrowing	Floating Borrowing
ANX	6%	LIBOR + 30 bps
AZE	8%	LIBOR + 80 bps

1. Briefly explain which company has an absolute advantage in both fixed and floating borrowing markets. (2 marks)

2. Compute the borrowing rate differential between ANX and AZE in each of the two markets. (2 marks)

3. Discuss ANX and AZEs comparative advantages in the two markets. Then explain how an interest rate swap could help the two companies transform their liabilities. (4 marks)

4. What is the total potential savings for ANX and AZE if they enter into an interest rate swap? Suppose they split the total potential savings evenly, what is the net borrowing cost for each of the two companies? Assume no financial intermediary is involved in the interest rate swap. (3 marks)

5. ANX and AZE have been told that an interest rate swap is equivalent to a series of forward rate agreements (FRAs). Explain the difference between an interest rate swaps settlement payment and an FRAs. (4 marks)