Company A needs $30 million at a floating-rate to fund a 5-year project while Company B desires $30 million at a fixed rate to complete its 5-year construction plans. Company A and Company B have been offered the following rates per annum on a $30 million 5-year loan:
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Fixed rate
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Floating rate
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Company A:
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12.0%
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LIBOR + 0.1%
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Company B:
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13.4%
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LIBOR + 0.6%
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- What might explain the differences in the rates offered the two companies?
- What is the QSD in this case?
- Design a swap that will net a bank, acting as intermediary, 0.1% per annum and that will appear equally attractive to both companies. Show your calculations as you illustrate the transaction.