. The following questions are based on the case provided below

Able Inc. and Baker Inc. face the following borrowing costs in the fixed and floating rate markets:

Each firm desires the rate other than that for which it has comparative advantage.

A dealer stands ready to enter into a swap as either a fixedrate payer or floating-rate receiver (or vice versa). The dealer will pay a fixed T+1% against LIBOR or receive T+1.40% against LIBOR. Assume that each firm borrows in the market in which it has comparative advantage and enters into a swap agreement. Analyze the potential gains from swapping for all parties under the following headlines:

a. What does the swap dealer earn?

b. Obtain the effective loan rate for Able. List all loans Able deals with.

c. By how much is Baker better-off from the swap agreement?

d. What is the overall benefit of the three parties: Able, Baker and the Dealer?

FixedRate Market Floating Rate Market Baker Able T + 1. 90% T +0.75% L+ 0.20% L 0.15% FixedRate Market Floating Rate Market Baker Able T + 1. 90% T +0.75% L+ 0.20% L 0.15%