Task1. Company AAA desires to borrow $20,000,000 at a floating rate for five years; Company BBB desires to borrow $20,000,000 at a fixed rate for five years. Their external borrowing opportunities in debt markets are given below in a table:
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Fixed-Rate Borrowing Cost
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Floating-Rate Borrowing Cost
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Company AAA
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3%
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LIBOR + 0.25%
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Company BBB
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4%
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LIBOR + 1%
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a. A swap bank intends the following five year interest only swap: Company AAA issues debt in market for $20 million fixed at 3.0% for five years. Each and every year Company AAA will pay the swap bank yearly interest payments on $20,000,000 with the coupon rate of LIBOR + 0.15%; in exchange the swap bank will pay to Company AAA interest payments on $20,000,000 at a fixed rate of 3.0%. What is annual dollar value of this swap to Company AAA?
b. The same swap bank intends the following five-year interest only swap: Company BBB issues debt in the market totalling $20 million at a floating rate of LIBOR + 1%. Each and every year Company BBB will pay the swap bank yearly interest payments on $20,000,000 with a fixed rate of 3.9%; in exchange the swap bank will pay to Company BBB interest payments on $20,000,000 at a floating rate of LIBOR + 1%. What is annual dollar value of this swap to Company BBB?
c. By arranging the above two swaps to correspond in time, what is annual dollar value of this swap to the swap bank?