(1)Companies X and Y have been offered the following rates per annum on a $10 million 5-year...
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Question:
(1)Companies X and Y have been offered the following rates per annum on a $10 million 5-year investment.
Company X
Company Y
Floating
LIBOR+0.5%
LIBOR+1%
Fixed
8%
9.2%
Company X prefers a floating-rate loan for the investment; company Y prefers a fixed-rate loan. To reduce financing costs, X borrows at a fixed rate, while Y borrows at a floating rate.
Design a swap contract such that company X has 0.4% interest savings and company Y has 0.3% interest savings.
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