Company A can borrow money at a fixed rate of 9 percent or a variablerate set at prime plus 1 percent. Company B can borrow money at avariable 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 theswap deal and the companies allocate the remaining QSD as 0.25% and0.5% to companies A and B respectively. i) Is there any gain for the concerned parties through the swapdeal?ii) If so, show a swapping arrangement, ensuring that both CompanyA and B are better off and the swap and the swap dealer gets the1% cut.

Company A can borrow money at a fixed rate of 9 percent or a variablerate set at prime plus 1 percent. Company B can borrow money at avariable 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 theswap deal and the companies allocate the remaining QSD as 0.25% and0.5% to companies A and B respectively. i) Is there any gain for the concerned parties through the swapdeal?ii) If so, show a swapping arrangement, ensuring that both CompanyA and B are better off and the swap and the swap dealer gets the1% cut.

Intermediate Financial Management (MindTap Course List)

13th Edition

ISBN:9781337395083

Author:Eugene F. Brigham, Phillip R. Daves

Publisher:Eugene F. Brigham, Phillip R. Daves

Chapter24: Enterprise Risk Management

Section: Chapter Questions

Problem 4P

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Company A can borrow money at a fixed rate of 9 percent or a variablerate set at prime plus 1 percent. Company B can borrow money at avariable 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 theswap deal and the companies allocate the remaining QSD as 0.25% and0.5% to companies A and B respectively.i) Is there any gain for the concerned parties through the swapdeal?(3 marks)ii) If so, show a swapping arrangement, ensuring that both CompanyA and B are better off and the swap and the swap dealer gets the1% cut.
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