Question: Alpha and Beta Companies can borrow for a five-year term at the following rates: Alpha Beta Moody's credit ratingAaBaa Fixed-rate borrowing cost10.5%12.0% Floating-rate borrowing costLIBORLIBOR

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

AlphaBeta

Moody's credit ratingAaBaa

Fixed-rate borrowing cost10.5%12.0%

Floating-rate borrowing costLIBORLIBOR + 1%

a.Calculate the quality spread differential (QSD).

b.Develop 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.No swap bank is involved in this transaction.

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