Company A desires a fixed-rate loan. Company A presently has access to floating interest rate funds at LIBOR 2%. Its direct borrowing cost is 15% in the fixed-rate bond market. In contrast, company B, which prefers a floating-rate loan, has access to fixed-rate funds at 12% and floating-rate funds at LIBOR 1%. Suppose both companies enter into an interest rate swap and split the spread differential; that is, they share the spread differential equally. With the swap deal, what interest rate would Company A pay for its fixed-rate funds?

 

Note: here the two firms enter into the swap deal directly without a bank, or you can assume they enter into it with a bank, but the gain to the bank from the swap is zero"

Answer rating: 100% (QA)

Answer lets analyze the scenario and calculate the fixed rate Company A would pay after the interest ... View the full answer