URGENT!! AAA Inc. and BBB Inc. both seek funding at the lowest possible cost. AAA would prefer...

AAA Question One (15 marks) AAA Inc. and BBB Inc. both seek funding at the lowest possible cost. AAA would prefer the flexibility of floating rate borrowing while BBB wants the security of fixed rate borrowing. AAA is the more credit-worthy company and, with the better credit rating, has lower financing costs in both debt markets. They each face the following rate structure: Floating interest Fixed interest LIBOR + 1% 5% BBB LIBOR + 2% 8% AAA wants floating rate debt - it could borrow from the floating market or borrow at the fixed rate and swap for floating rate debt. On the other hand, BBB wants fixed rate debt - it could borrow at the fixed rate or borrow floating and swap for fixed rate debt. Required: a) Describe and calculate the funding cost advantage enjoyed by AAA, which represents the opportunity set for improvement in funding costs to be distributed between both parties. (1 mark) b) Based on your analysis in part a), please suggest the type of funds (fixed or floating) for AAA and BBB. (2 marks) c) Using the savings as a result of AAA's funding cost advantage, design a swap arrangement between AAA and BBB that meets their preferences for interest rate payments and which also results in a lower funding cost for both companies. (6 marks) d) Assume that the notional value of the swap arrangement is $100 million, the maturity of the agreement is 4 years, and the current LIBOR rate is 5% p.a. In a table, show the net swap payments in each year and which party makes a payment, if the LIBOR rate over the next 4 years is 6%, 7%, 8% and 9%. Also assume the fixed-rate is 5% in the swap contract. (6 marks)