Alpha and Beta Companies can borrow at the following rates.
Alpha Beta
Moody's credit rating ............................................... Aa.......................... Baa
Fixed-rate borrowing cost .........................................10% .....................13.0%
Floating-rate borrowing cost ............................... LIBOR + 0.5 .......... LIBOR + 1.5%
1- Calculate the QSD
2- Develop an interest rate swap in which both Alpha and Beta have an equal cost savings in their borrowing costs. Assume Alpha desires floating-rate debt and Beta desires fixed-rate debt.
3- Do over again, this time assuming more realistically that a swap bank is involved as an intermediary and the QSD will be divided as follow: 10% for swap bank, 50% for beta and 40% for alpha. Develop an interest rate swap. show the final costs for alpha and beta.