Compute the Quality Spread Differential

Question

Alpha and Beta Companies can borrow at the below given rates.

                                                           Alpha          Beta

Moody's credit rating                        Aa             Baa

Fixed-rate borrowing cost           10.5%         12.0%

Floating-rate borrowing cost LIBOR LIBOR + 1%

Compute the Quality Spread Differential (QSD).

Solution:

The QSD = (12.0% - 10.5%) minus (LIBOR + 1% - LIBOR) = .5%.