1. Alpha and Beta Companies can borrow for a five-year term at the following rates:

Alpha Beta

Moodys credit rating Aa Baa

Fixed-rate borrowing cost 10.5% 12.0%

Floating-rate borrowing cost LIBOR LIBOR + 1%

b. Develop an interest rate swap in which both Alpha and Beta have an equal cost savings in their borrowing costs. Draw the cash flow chart and calculate net cashflows as Exhibit 14.4. Assume Alpha desires floating-rate debt and Beta desires fixed-rate debt. Assume the swap bank is quoting five-year dollar interest rate swaps at 10.7% - 10.8% against LIBOR flat.