Two companies have investments which pay the following rates of interest:

Firm A= Fixed: 6%, Float: Libor

Firm B= Fixed: 8%, Float: Libor+0.5%

Assume A prefers a fixed rate and B prefers a floating rate. Show how these two firms can both benefit by entering into a swap agreement. If an intermediary charges both parties equally a 0.1% fee and any benefits are spread equally between Firm A and Firm B, then

1) what rates could A and B receive on their preferred interest rate? (1 mark)

2) Please draw the cash flow chart. (1 mark)