(Solution Download) Is there an opportunity here for ABC and XYZ to benefi t by means of an interest rate swap?


ABC Company and XYZ Company need to raise funds to pay for capitalimprovements at their manufacturing plants. ABC Company is a well-established fi rm with anexcellent credit rating in the debt market; it can borrow funds either at 11 percent fi xed rate orat LIBOR + 1 percent fl oating rate. XYZ Company is a fl edgling start-up fi rm without a strongcredit history. It can borrow funds either at 10 percent fi xed rate or at LIBOR + 3 percent fl oatingrate.a. Is there an opportunity here for ABC and XYZ to benefi t by means of an interest rateswap?b. Suppose you?ve just been hired at a bank that acts as a dealer in the swaps market, andyour boss has shown you the borrowing rate information for your clients ABC and XYZ.Describe how you could bring these two companies together in an interest rate swap thatwould make both fi rms better off while netting your bank a 2.0 percent profit.

 







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