Company A, a low rated firm, desires a fixed rate, long term loan. Company A currently has access to floating-rate funds at a margin of 1.2% over LIBOR. Its direct borrowing cost is 13% in the fixed rate bond market. In contrast, Company B, which prefers a floating rate loan, has access to fixed rate funds in the Eurodollar bond market at 11% and floating rate funds at LIBOR + 0.50%.
(a) What’s the total cost savings can be realized?
(b) Suppose they(A and B) split the cost savings. How much would A pay for its fixed rate funds? How much would B pay for its floating rate funds?
(c) Suppose the intermediary bank gains profit of 0.1%, redo the above problem (ii)?