Company A desires a variable – rate loan but currently has a better deal from the fixed- rate market at a rate of 13%. If company A borrows from the variable -rate market, the cost would be LIBOR +2%. In contrast, Company B, which prefers a fixed- rate loan, has a better deal from the variable-rate market at LIBOR +3%.If company B borrows from the fixed- rate market, the cost would be 16%. Knowing both companies’ needs, bank C designed a swap deal. the deal is outlined in the following
Company A obtain A variable-rate loan at 13%
Company B Obtains A variable- rate loan at Libor + 3 %
Company A pays Banks C a Variable rate of Libor +1% and receives a fixed rate of 13.3% from the bank
Company b pays bank C a fixed rate of 14.5% and receives a variable rate of LIBOR + 2.0 from the bank.