Company A and Company B are considering a five-year interest rate swap for $10 million in principal.
As a result of looking at the capital market, the two companies were presented with the following annual interest rates.
Corporate fixed rate variable rate
Company A 4.5% LIBOR
Company B 5.4% LIBOR+0.5%

Suppose Company A wants to borrow at a variable rate, and Company B wants to borrow at a fixed rate. Design a swap that allows the bank to have a net profit of 0.2% per annum and allows both companies to earn equal profits

Answer rating: 100% (QA)

To design a swap that allows the bank to have a net profit of 02 per annum and allows both companies ... View the full answer