Alpha and Beta Companies can borrow for a five$-$year term at the following rates:

ALPHA

MOODY'S CREDIT RATING

FIXED$-$RATE BORROWING COST

FLOATING$-$RATE BORROWING COST

BETA

$Aa$

$9\mathrm{.}5\%$

LUBOR

LIBOR $+1\%$

a$)$ Calculate the quality spread differential $($QSD$).$ Describe 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. Assume no swap bank is involved.

b$)$ Repeat the above assuming that a swap bank is involved as an intermediary. Assume the swap bank is quoting five$-$year dollar interest rate swaps at $9\mathrm{.}7-9\mathrm{.}8$ percent against LIBOR flat.