Two companies have investments which pay the following rates of interest: Firm A: Fixed: 6% Float: Libor
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Question:
Two companies have investments which pay the following rates of interest:
Firm A:
Fixed: 6%
Float: Libor
Firm B:
Fixed: 8%
Float: Libor+0.5%
Assume A prefers a fixed rate and B prefers a floating rate. Show how these two firms can both benefit by entering into a swap agreement. If an intermediary charges both parties equally a 0.1% fee and any benefits are spread equally between Firm A and Firm B, then
1) what rates could A and B receive on their preferred interest rate? (1 mark)
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