Question: Suppose company Alpha can issue five year fixed rate debt at 10.5% or floating rate debt at LIBOR. Company Beta can issue five year fixed

Suppose company Alpha can issue five year fixed rate debt at 10.5% or floating rate debt at LIBOR. Company Beta can issue five year fixed rate debt at 12.0% or floating rate debt at LIBOR+1%. A swap bank is quoting five year dollar interest rate swaps at 10.7- 10.8% against LIBOR flat. Suppose Alpha desires floating rate debt and Beta desires fixed rate debt. Compute the quality spread differential (QSD). Develop an interest rate swap in which both Alpha and Beta have an equal savings in their borrowing costs.

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