Company A can borrow money at a fixed rate of 9 percent or a variable rate set at prime plus 1 percent. Company B can borrow money at a variable rate of prime plus 2 percent or a fixed rate of 8.25 percent. Company A prefers a fixed rate and company B prefers a variable rate. A swap dealer can bring them together for a commission of 1% on the swap deal. a) Compute the potential gain for the concerned parties through the swap deal? b) Show a swapping arrangement, ensuring that both Company A and B are better off and the swap dealer gets the 1% cut.
Company A can borrow money at a fixed rate of 9 percent or a variable rate set at prime plus 1 percent. Company B can borrow money at a variable rate of prime plus 2 percent or a fixed rate of 8.25 percent. Company A prefers a fixed rate and company B prefers a variable rate. A swap dealer can bring them together for a commission of 1% on the swap deal. a) Compute the potential gain for the concerned parties through the swap deal? b) Show a swapping arrangement, ensuring that both Company A and B are better off and the swap dealer gets the 1% cut.
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Transcribed Image Text:Company A can borrow money at a
fixed rate of 9 percent or a
variable rate set at prime plus 1
percent. Company B can borrow
money at a variable rate of prime
plus 2 percent or a fixed rate of
8.25 percent. Company A prefers a
fixed rate and company B prefers
a variable rate. A swap dealer
can bring them together for a
commission of 1% on the swap
deal.
a) Compute the potential gain
for the concerned parties
through the swap deal?
b) Show a swapping
arrangement, ensuring that
both Company A and B are
better off and the swap
dealer gets the 1% cut.
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