My question is how is value in percentage calculated what alpha needs to pay and

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My question is how is value in percentage calculated what alpha needs to pay and what beta needs to pay. in detail explanation.

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uie, et the hominal rate of one counterparty etn the other. fter the initial principal exchange, is the counterparty at is required to make interest payments at the higher nominal rate at a financial sadvantage to the other in the swap agreement? Explain your thinking I. Alpha and Beta Companies can borrow for a five-year term at the following ra tes: Beta Moody's credit rating Fixed-rate borrowing cost Floating-rate borrowing cost Alpha Aa 10.5% LIBOR Baa 12 .0% LIBOR + 1% a. Calculate the quality spread differential (QSD). b. Develop an interest rate swap in which both Alpha and Beta have an equal cost savings in their borrowing costs. Assume Alpha desires floating-rate debt and Beta desires fixed-rate debt. No swap bank is involved in this transaction.

Explanation / Answer

a. Calculation of QSD Beta Alpha Differential Fixed Rate 12% 10.50% 1.50% Floating Rate LIBOR+1 LIBOR 1.00% 0.50% b The Firms should consider their comparative benefits on Borrowing Keeping in mind of comparative advantage Alpha Needs to issue Fixed rate debt @10.5 and Beta needs to Issue Floating Rate debt at LIBOR +1% On this Alpha needs to pay LIBOR to Beta and Beta Needs to Pay @10.75% to Alpha Alpha's Floating Rate all in Cost is : 10.5%+LIBOR-10.75% = LIBOR-.25%, a .25% Savings over Issue of Floating rate Debt of tis Own Beta's Fixed Rate all in Cost is        : (LIBOR+1)+10.75%-LIBOR = 11.75%, a. .25% Savings over issue of Fixed Rate Debt

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