3. [8pts] The Star Chemical Company wants to finance one of its production plants by borrowing...

 

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3. [8pts] The Star Chemical Company wants to finance one of its production plants by borrowing $150 million for five years. Based on its moderate credit ratings, Star can borrow five-year funds at a 10.5% fixed rate or at a floating rate equal to LIBOR + 75 bp. Given the choice of financing, Star prefers the fixed-rate loan. The Moon Development Company is also looking for five-year funding to finance its proposed $150 million office park development. Given its high credit rating, Moon can borrow the funds for 5 years at a fixed rate of 9.5% or at a floating rate equal to the LIBOR + 25 bp. Given the choice, Moon prefers a variable-rate loan. In summary, Star and Moon have the following fixed and floating rate loan alternatives:< e t Company Star Company Moon Company Fixed Rate< 10.5% 9.5% Floating Rate LIBOR + 75 bp LIBOR + 25 bp<¹ E K (1) [2pts] Describe Moon's absolute advantage and each company's comparative advantage? (2) [2pts] What is the total possible interest rate reduction gain for the parties if both were to create synthetic positions with a swap?< 3. [8pts] The Star Chemical Company wants to finance one of its production plants by borrowing $150 million for five years. Based on its moderate credit ratings, Star can borrow five-year funds at a 10.5% fixed rate or at a floating rate equal to LIBOR + 75 bp. Given the choice of financing, Star prefers the fixed-rate loan. The Moon Development Company is also looking for five-year funding to finance its proposed $150 million office park development. Given its high credit rating, Moon can borrow the funds for 5 years at a fixed rate of 9.5% or at a floating rate equal to the LIBOR + 25 bp. Given the choice, Moon prefers a variable-rate loan. In summary, Star and Moon have the following fixed and floating rate loan alternatives:< e t Company Star Company Moon Company Fixed Rate< 10.5% 9.5% Floating Rate LIBOR + 75 bp LIBOR + 25 bp<¹ E K (1) [2pts] Describe Moon's absolute advantage and each company's comparative advantage? (2) [2pts] What is the total possible interest rate reduction gain for the parties if both were to create synthetic positions with a swap?<

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Answer Explanation given company star company Moon Company others The absolute Advanta... View the full answer