Question: Alpha and Beta Companies can borrow for a five-year term at the following rates: Alpha Beta Moody's Credit Rating Aa Baa Fixed-rate borowing cost 10.0%

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

Alpha Beta

Moody's Credit Rating Aa Baa

Fixed-rate borowing cost 10.0% 12.5%

Floating-rate borrowing cost LIBOR LIBOR + 1%

a. Calculate the quality spread differential (QSD).

b. Develop an interest rate swap in which a swap bank, Alpha and Beta share the savings equally if any. Assume Alpha desires floating-rate debt and Beta desires fixed-rate debt. (10)

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