Company AA and company BB each need $1 million in funds and are quoted the following rates in the fixed and floating markets. AA agrees to borrow at the fixed-rate and BB agrees to borrow at the floating-rate. Show all calculations.

Debt market	AA	BB
Fixed rate funds	5.4%	6.4%
Variable rate funds	BBSW + 2%	BBSW + 2.2%

Required:

a)   Structure a swap which allows the two companies to share the differential benefit equally.     (8 marks)

b)   What fixed rate would AA receive from BB if they negotiated to receive 75% share of the differential?     (2 marks)

c)   Why would a swap be arranged even if the differential is zero.     (3 marks)

d)   List and briefly explain the three basic types of swaps.     (6 marks)

Answer rating: 100% (QA)

Debt Swap Analysis Scenario Company AA needs 1 million at a fixed rate and is offered 54 Company BB ... View the full answer