Suppose a company wants to borrow $100 million for five years at a fixed rate.

Suppose the company can issue both a five-year, 11%, fixed-rate bond paying coupons on a semiannual basis and a five-year FRN paying LIBOR plus 100 bp.

a. Explain how the company could create a synthetic five-year fixed-rate loan with a swap.

b. What would the fixed rate on the swap have to be for the synthetic position to be equivalent to the direct loan position? Show the synthetic position in a table.

c. Define the company’s criterion for selecting the synthetic loan.