Question: SafeCo can issue floating-rate debt at LIBOR + 1% or fixed-rate debt at 8%, but it would prefer to use fixed-rate debt. RiskyCo can issue

SafeCo can issue floating-rate debt at LIBOR + 1% or fixed-rate debt at 8%, but it would prefer to use fixed-rate debt. RiskyCo can issue floating-rate debt at LIBOR + 2% or fixed-rate debt at 8.8%, but it would prefer to use floating-rate debt. Explain why both companies might be better off if SafeCo issues floating-rate debt, RiskyCo issues fixed-rate debt, and they then swap payment streams. Assume that if they do arrange a swap, SafeCo will make a fixed payment of 6.9 percent to RiskyCo, and RiskyCo will make a payment of LIBOR (which is currently 6%) to SafeCo.

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