Company A can borrow at a fixed rate of 6.0% or a floating rate of LIBOR + 0.2%. Company B can borrow at a fixed rate of 6.8% or a floating rate of LIBOR + 0.6%.
(a) If Company A desires a floating rate and Company B desires a fixed rate, design a swap that will net a bank 0.2% and appear equally attractive to both companies.
(b) If the nominal amount of the loan is $10 million, what is the annual cash flow from Company B to the bank? What is Company B’s net annual cash flow due to this loan?