Question: Alpha and Beta Companies can borrow for a five-year term at the following rates: Alpha Beta Fixed-rate borrowing cost 10.0% 12% Floating-rate borrowing cost LIBOR+1%

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

Alpha

Beta

Fixed-rate borrowing cost

10.0%

12%

Floating-rate borrowing cost

LIBOR+1%

LIBOR

a. Calculate the quality spread differential (QSD).How do Alpha and Beta swap their borrowings?

b. Calculate all in- cost in which both Alpha enjoys 60% of total cost savings while Beta enjoys 40% total cost savings in their borrowing costs.

c. Suppose a bank charges .8% to arrange the swap and Alpha and Beta split the resulting cost savings.

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