Tesla can raise fixed term finance at 3 per cent per year and floating rate finance indexed against the London Interbank Offered Rate (LIBOR), at LIBOR + 0.25 per cent. If it raises finance, Tesla would want to pay floating rate.

Pepsi can raise fixed rate at 4.50 per cent per year and borrow floating rate at LIBOR + 0.50. It wants to pay a fixed rate on its borrowings.

Assuming the two firms are happy to enter into a swap to obtain an advantage, construct an interest rate swap where Tesla obtains 60 per cent of any advantage from the indirect financing approach. What coupon rate would the swap have assuming the floating rate payment is LIBOR (without a margin)? (Assume interest is paid annually for both fixed and floating.)

Answer rating: 100% (QA)

Heres how to construct an interest rate swap where Tesla obtains 60 of the advantage from the indire... View the full answer