The following are the rates that Q and R Company need to pay for issuing either variable or fixed rate Euro bond.
Fixed Variable
Q Company 9 % LIBOR + ½%
R Company 10 ½% LIBOR + 1%
Company prefers variable rate debt whereas R prefers fixed rate debt.
a) Given the respective preference show clearly whether an interest rate swap is feasible.
b) What is the total gain possible in the interest swap deal?
c) If the gain is to be shared equally between Q and R, structure a feasible deal. Show clearly the payment and receipts of each party and identify the gain.
d) Assume that S is the intermediary bank that locates and matches the need of Q and R and the gain from the swap is to be shared between Q, R and S in the ratio of 50%, 25% and 25% respectively. Construct a feasible swap deal. Identify the flows to all the parties clearly.