1. How much would the effective cost of the borrowing to ABC after the swap? 2. Assuming that the treasury bond rate is 6%, how much is the annual interest expense of DEF? 3. How much is the total cost savings to the holding corporation because of the interest rate swap
ABC and DEF are subsidiaries to a holding corporation and both need to borrow P10,000,000 for one year. ABC Corporation has the option to borrow at a fixed rate of 13% or at a variable rate of treasury bond rate plus 4%. On the other hand, DEF Corporation has the option to borrow at a fixed rate of 12% or at a variable rate of treasury bonds rate plus 6%. ABC prefers fixed-rate borrowing while DEF prefers a variable-rate one. As the financial adviser, you would recommend an interest rate swap.
1. How much would the effective cost of the borrowing to ABC after the swap?
2. Assuming that the treasury bond rate is 6%, how much is the annual interest expense of DEF?
3. How much is the total cost savings to the holding corporation because of the interest rate swap?
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