Question 1. Company A, a low-rated firm, desires a fixed-rate, long-term loan. Company A currently has access to floating-rate funds at a margin of 1.5% over LIBOR. Its direct borrowing cost is 13% in the fixed-rate bond market. In contrast, Company B, which prefers a floating-rate loan, has access to fixed-rate funds in the Eurodollar bond market at 11% and floating-rate funds at LIBOR + 0.50%.
How can A and B use a swap to advantage?
Question 2. Explain how Cisco Systems can use arbitrage to create a forward forward to fix the interest rate on a three-month $10 million loan to be taken out in nine months. The loan will be priced off LIBOR. (Hint: Lecture Slide 18)
Question 3. Explain why an interest rate swap is a useful tool for active liability management and for hedging against interest rate risk.
PLEASE EXPLAIN IN DETAIL and show any calculations.