Xavier Manufacturing and Zulu Products both seek funding at the lowest possible cost. Xavier would prefer the flexibility of floating rate borrowing, while Zulu wants the security of fixed rate borrowing. Xavier is the more credit-worthy company. They face the following rate structure. Xavier, with the better credit rating, has lower borrowing costs in both types of borrowing. Both parties have agreed to split the comparative advantage 2/3s in favor of Xavier
Xavier wants floating rate debt, so it could borrow at LIBOR+1%. However it could borrow fixed at 9% and swap for floating rate debt. Zulu wants fixed rate, so it could borrow fixed at 13%. However it could borrow floating at LIBOR+2% and swap for fixed rate debt, what is the final interest both parties will pay? If the notional amount barrowed is $20,000,000 and LIBOR rises by .25% what is the cost incurred and who pays this amount to whom?