Question: 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 +

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%

Assuming that a swap bank is involved as an intermediary.Assume the swap bank is quoting five-year dollar interest rate swaps at 10.7% - 10.8% against LIBOR flat.

4.1. How much in total can be saved by entering into a swap deal with a bank?

4.2. Develop an interest rate swap with the swap bank being involved. Assume Alpha desires floating-rate debt and Beta desires fixed-rate debt.

a.At what rate should Alpha finance?

b. at what rate should Beta finance?

c. at what rate should the Bank pay Alpha?

d. t what rate should Beta pay the Bank?

4.3. From arranging this swap, what is the net cost and cost savings for Alpha, Beta? what is the profit for the bank? Please answer the following questions.

Net cost for Alpha:

Cost savings for Alpha:

Net cost for Beta:

Cost savings for Beta:

Profit for the Bank from this swap:

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