Company a desires a fixed-rate loan with the swap deal at


Company A desires a fixed-rate loan. Company A presently has access to floating interest rate funds at a margin of 1.5% 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 at 11% and floating rate funds at LIBOR + 0.5%. Suppose both companies enter into an interest rate swap and split the spread differential that is they share the spread differential equally. With the swap deal at what interest rate would Company A pay for its fixed rate funds?

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Financial Management: Company a desires a fixed-rate loan with the swap deal at
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