Consider Firms A and B; each firm wants to borrow $40 million for three years

Consider Firms A and B; each firm wants to borrow $40 million for three years.

Consider Firms A and B; each firm wants to borrow $40 million for three years. Firm A wants to finance an interest-rate-sensitive asset and therefore wants to borrow at rate. A has good credit and can borrow at LIBOR. Firm B wants to finance an interest-rate-insensitive asset and thus wants to borrow at a fixed rate. B has less-than-pe and can borrow fixed at 5.5%.

                      Borrowing Costs     Fixed Floating 

Firm A                   $5%                      LIBOR

Firm B                  $5.5%                LIBOR +0.2%

Let’s say these two firms can conduct a Swap agreement by using a Swap Bank. The Swap Bank has these quotes (against LIBOR):

                   Bid          Ask

3years    5.10%     5.20%

a) Based on the figure below, how much does Firm A pay the Swap Bank, receive from the Swap Bank and Pay Bank X using LIBOR at T=1 ?

b) Based on the figure below, how much does Firm B pay the Swap Bank, receive from the Swap Bank and Pay Bank Y using LIBOR at T=1 ?

c) How much do firms A and B save relative to borrowing at their respective rates directly from the bank using LIBOR at T=1?

 

SOLUTION

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Larger amounts of financing affect cost of capital mostly for all of the following reasons EXCEPT The Maths Lock solution codechef Minimum Adjacent Swaps to Reach the Kth Smallest Number Minimum Interval to Include Each Query

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