Use the following data to answer this question: Fixed Floating Firm AAA Firm BBB

ID: 2795091 • Letter: U

Question

Use the following data to answer this question:

Fixed

Floating

Firm AAA

Firm BBB

LIBOR + 0.2%

Spread?

2. Firm AAA has a/an ______ advantage in ________ markets.

a. Comparative, both

b. Absolute, both

c. Comparative, fixed

d. Absolute, floating

3. Use the data in the previous question to answer this question.

If you design a swap that is equally attractive to both firms, what must Firm AAA pay Firm BBB?

a. 9.25%

b. 9.75%

c. LIBOR + 0.25

d. LIBOR + 1.75

Fixed

Floating

Firm AAA

10% LIBOR + 0.5%

Firm BBB

11%

LIBOR + 0.2%

Spread?

? ?

Spread for BBB in fixed markets = 1%

Spread for AAA in floating market = LIBOR + 0.5% - (LIBOR + 0.2%) = 0.3%

Firm A has a comparative advantage in fixed rate markets.(ie 1% less interest rate)

A's floating rate is relaively higher to B. So A will like to pay lesser floating rate( if it expects the floating rate to fall) . LIBOR + 0.25%.

So Answer c)

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