Question: Company A and B both require $5 million for a 5-year period. Company A: a AAA-rated company, would like to borrow at a floating rate.

Company A and B both require $5 million for a 5-year period.

Company A: a AAA-rated company, would like to borrow at a floating rate.

Company B: a BBB-rated company, would like to borrow at a fixed rate.

Borrower Fixed-rate available Floating-rate available

A: AAA-rated 8.0% LIBOR

B: BBB-rated 10.0% LIBOR + 0.5%

(a)Based on the above information, can Companies A and B use an interest-rate swap to save their borrowing cost? Explain briefly.

Suppose A and B want to split the cost savings equally, how much (i.e., interest rate) would Company A pay for its floating-rate funds after the swap? How much (i.e. interest rate) would Company B pay for its fixed-rate funds after the swap?

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