Lluvia and Paraguas. Lluvia Manufacturing and Paraguas Products both seek funding at the lowest possible cost. Lluvia would prefer the flexibility of floating-rate borrowing, while Paraguas wants the security of fixed-rate borrowing. Lluvia isthe more creditworthy company. They face the following rate structure. Lluvia, with the better credit rating, has lower borrowing costs in both types of borrowing. Lluvia wants floating-rate debt, so it could borrow at LIBOR + 1.000%. However, itcould borrow fixed at 8.500% and swap for floating-rate debt. Paraguas wants fixed-rate debt, so it could borrow fixed at 12.500%. However, it could borrow floating at LIBOR +2.000% and swap for fixed-rate debt. What should they do? (LIBORis 5.500%.)Lluvia's comparative advantage is %. (Round three decimal places.)

In case of interest rate swap, two parties exchange their interest rates for the same notional…

Answered: Lluvia and Paraguas. Lluvia…

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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Lluvia Manufacturing and Paraguas Products both seek funding at the lowest possible cost. Lluvia would prefer the flexibility of floating-rate borrowing, while Paraguas wants the security of fixed-rate borrowing. Lluvia is the more creditworthy company. They face the following rate structure. Lluvia, with the better credit rating, has lower borrowing costs in both types of borrowing. Lluvia wants floating-rate debt, so it could borrow at LIBOR+1.000%. However, it could borrow fixed at 8.500% and swap for floating-rate debt. Paraguas wants fixed-rate debt, so it could borrow fixed at 12.500%. However, it could borrow floating at LIBOR+2.000% and swap for fixed-rate debt. What should they do? (LIBOR is 5.500%.) Lluvia's comparative advantage is % (round 3 decimals) Paraguas's net interest after a swap with Lluvia is (round 3 decimals) Lluvia's savings on borrowing versus net swap is (round 3 decimals) Paraguas's savings on borrowing versus net swap is (round 3 decimals)
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