Company A can borrow 6 months floating rate at LIBOR + 0.50%. Company A can also borrow 5 year fixed rate at 10.75%. They would like a floating rate.
Company B can borrow 6 months floating rate at LIBOR + 0.25%. Company B can also borrow 5 year fixed rate at 10%. They would like to reduce floating rate cost.
A) Draw a cash flow chart of all parties.
B) What is Company A's all in cost?
C) What is Company B's all in cost?
D) How much does the SWAP bank make?
E) If LIBOR is 3% the first year, indicate the amount of cash flow of all parties with $1,000,000 notional.
Company A believes interest rates will decrease while Company B thinks they will increase.