Company A needs $30 million at a floating-rate to fund a 5-year project while Co

Question

Company A needs $30 million at a floating-rate to fund a 5-year project while Company B desires $30 million at a fixed rate to complete its 5-year construction plans. Company A and Company B have been offered the following rates per annum on a $30 million 5-year loan:

1. What might explain the differences in the rates offered the two companies?

2. What is the QSD in this case?

3. Design a swap that will net a bank, acting as intermediary, 0.1% per annum and that will appear equally attractive to both companies. Show your calculations as you illustrate the transaction.

Fixed rate Floating rate Company A: 12% LIBOR + 0.1% Company B: 13.4% LIBOR + 0.6%

Explanation / Answer

1. Difference in rates could be because of the RATINGS of two companies for example company A would have a AAA rating, whereas company B have AA ratings.

2.

Fixed rate Floating rate Total Company A 12% LIBOR + 0.1% Company B 13.4% LIBOR + 0.6% QSD 1.4% 0.5% 1.9%

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