Solved: Spreads in the floating and fixed rate markets, Finance Basics

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Spreads in the floating and fixed rate markets

Question: Assume that Company A has a fixed rate of 6.00% and a floating rate of LIBOR +1.40% and Company B has a fixed rate of 7.00% and a floating rate of LIBOR + 1.70%. Determine how these companies could engage in an interest rate swap to decrease their cost of financing. (Hint: you will need to assume an agreed upon rate that makes this swap possible) What would you expect to happen to the spreads in the floating and fixed rate markets?

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Finance Basics: Spreads in the floating and fixed rate markets

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Finance Basics: Spreads in the floating and fixed rate markets

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