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Companies A and B face the following interest rates (adjusted for the differential
Chapter 7, Problem 7.11(choose chapter or problem)
Companies A and B face the following interest rates (adjusted for the differential impact of taxes): Company A Company B US dollars (floating rate) : LIBOR 0.5% LIBOR 1.0% Canadian dollars (fixed rate) : 5.0% 6.5% Assume that A wants to borrow US dollars at a floating rate of interest and B wants to borrow Canadian dollars at a fixed rate of interest. A financial institution is planning to arrange a swap and requires a 50-basis-point spread. If the swap is to appear equally attractive to A and B, what rates of interest will A and B end up paying?
Questions & Answers
QUESTION:
Companies A and B face the following interest rates (adjusted for the differential impact of taxes): Company A Company B US dollars (floating rate) : LIBOR 0.5% LIBOR 1.0% Canadian dollars (fixed rate) : 5.0% 6.5% Assume that A wants to borrow US dollars at a floating rate of interest and B wants to borrow Canadian dollars at a fixed rate of interest. A financial institution is planning to arrange a swap and requires a 50-basis-point spread. If the swap is to appear equally attractive to A and B, what rates of interest will A and B end up paying?
ANSWER:Step 1 of 2
The cost of borrowing, if company A borrows Canadian dollars at fixed rate and company B at floating rate:
The cost of borrowing, if company B borrows USD at floating rate and and Company B borrows Canadian dollars at fixed rate:
If company decides to swap from floating to fixed rate the savings would be of 1%