Suppose that your firm is Aaa-rated and can borrow five-year fixed rate debt at 12% and floating rate debt at the T-bill rate plus i.e., at 9+%. You are approached by a Baarated firm that can borrow five-year fixed rate debt at 13% and floating rate debt at the T-bilI rate plus 1%.
The Baa firm wants to swap $100 million of its floating rate debt for an equivalent amount of your fixed rate debt. It is willing to pay 121% to you on the fixed rate debt and asks that you pay the T-bill rate plus 1% on its floating rate debt. Should you do the deal?