Question: A Corp. wishes to be a floating-rate dollar borrower, which it can be at SOFR+1%. B Corp. strongly prefers fixed-rate debt, but it must pay

A Corp. wishes to be a floating-rate dollar borrower, which it can be at SOFR+1%. B Corp. strongly prefers fixed-rate debt, but it must pay 1.5% more than the 6.25% coupon that As notes would carry.

(1) If B Corp. can borrow SOFR+1.5%, what is the maximum possible cost savings to A Corp. from engaging in a currency swap with B Corp.? What should be swap rate for A Corp. to enjoy this maximum gain?

(2) If B Corp. can borrow SOFR+0.5%. What is the maximum gain from the swap trade? Suppose a bank charges 0.8% to arrange the swap and A and B split the resulting cost savings, how much will A pay for its floating-rate money? How much will B pay for its fixed-rate money?

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