Question: 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

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%

a. Calculate the quality spread differential (QSD). b. Develop an interest rate swap in which both Alpha and Beta have an equal cost savings in their borrowing costs. Assume Alpha desires floating-rate debt and Beta desires fixed-rate debt. No swap bank is involved in this transaction.

My question is how is the value in percentage calculated. what alpha needs to pay and what beta needs to pay. Please explain in detail.

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