Company A, a low rated firm, desires a fixed rate, long term loan. Company A currently has access to floating-rate funds at a margin of 1.5% over LIBOR. Its direct borrowing cost is 13% in the fixed rate bond market. In contrast, Company B, which prefers a floating rate loan, has access to fixed rate funds in the Eurodollar bond market at 11% and floating rate funds at LIBOR + 0.50%.

a. How can A and B use a swap to advantage?

b. Suppose they split the cost savings. How much would A pay for its fixed rate funds? How much would B pay for its floating rate funds?