2. Company A is a high risk firm which wants a fixed rate long term loan. Its borrowing rate is 12% in the fixed rate market. It is presently borrowing at a floating rate (base rate + 1.50%) from its current banker. Company B prefers a floating rate loan, where it can borrow at LIBOR + 0.50%, yet it is currently paying a rate of 9% in the fixed rate market. You are the manager of a swap desk for a major bank. Work out a swap which would generate a 5 basis point profit to the bank and split the rest equally between both counter parties (A and B).
a. What will be the rate you will charge Co. A?
b. What will be the rate you will pay Co. A?
c. Calculate the effective rate of interest paid by Co. A.
d. What will be the rate you will charge Co. B?
e. What will be the rate you will pay Co. B?
f. Calculate the effective rate of interest paid by Co. B.