Consider Company X and Company Y; each firm wants to borrow 100 million for 3 years....

 

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Consider Company X and Company Y; each firm wants to borrow 100 million for 3 years. Company X wants to finance an interest-rate-sensitive asset and therefore wants to borrow at a floating rate. Company Y wants to finance an interest-rate-insensitive asset and thus wants to borrow at a fixed rate. Company X can borrow at fixed-rate of 10.20% or at a floating of LIBOR. Company Y can borrow at a fixed-rate of 11.20% or at a floating-rate of LIBOR + 0.4%. The swap bank charges 0.2% for a three-year swap (bid-ask quotes of 10.4% - 10.6%). Required: a) Determine whether there is a swap opportunity for the companies by calculating the quality spread differential (QSD). b) Tabulate the net cash flow for each company. Consider Company X and Company Y; each firm wants to borrow 100 million for 3 years. Company X wants to finance an interest-rate-sensitive asset and therefore wants to borrow at a floating rate. Company Y wants to finance an interest-rate-insensitive asset and thus wants to borrow at a fixed rate. Company X can borrow at fixed-rate of 10.20% or at a floating of LIBOR. Company Y can borrow at a fixed-rate of 11.20% or at a floating-rate of LIBOR + 0.4%. The swap bank charges 0.2% for a three-year swap (bid-ask quotes of 10.4% - 10.6%). Required: a) Determine whether there is a swap opportunity for the companies by calculating the quality spread differential (QSD). b) Tabulate the net cash flow for each company.

Answer rating: 100% (QA)

Answer a To determine if there is a swap opportunity we need to calculate the Quality S... View the full answer