Question: ABC Inc. XYZ Inc. Fixed Rate (%) 5% 6% Floating Rate (%) LIBOR +0.50% LIBOR +0.75% ABC Inc. and XYZ Inc. have agreed to swap

ABC Inc. XYZ Inc. Fixed Rate (%) 5% 6% Floating Rate (%) LIBOR +0.50% LIBOR +0.75% ABC Inc. and XYZ Inc. have agreed to swap their debt payments so that each firm gets its preferred debt terms. They can arrange an interest rate swap through S Bank. S bank only charges 0.15% for its services on the fixed rate side of the swap. The remaining savings from the interest rate swap are equally shared by ABC Inc. and XYZ Inc. (Assume that ABC Inc. pays LIBOR to S Bank in the swap deal). a) What is Quality Spread Differential (QSD) available in this interest rate swap? b) What effective rate does ABC Inc. pay on its preferred debt in this swap deal? c) What effective rate does XYZ Inc. pay on its preferred debt in this swap deal? d) Illustrate the cash flows from this swap deal using Chart, labeling all the rates exchanged among parties in this swap deal on the Chart. (Assume that ABC Inc. pays LIBOR to S Bank and S Bank only charges 0.15% for its services on the fixed rate side of the swap)

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