12. Consider Bank A and Company B. Each needs $10 million dollars for an investm
ID: 2804063 • Letter: 1
Question
12. Consider Bank A and Company B. Each needs $10 million dollars for an investment project and plans to borrow the money over five years. The table below shows the fixed and flexible rates Bank A and Company B can borrow in the market. Company B 5 per cent Bank A Fixed rate3 per cent Flexible rate CDOR CDOR 1.25 per cent (a) Calculate the quality spread difference; (b) Propose an interest swap agreement that is beneficial to Bank A, Company B and Swap Bank SB; (c) Calculate the amount of money Bank A and Company B save each year and how much Swap Bank SB makes each year as a result of the swap.Explanation / Answer
a) Statement showing Quality spread difference
b) Bank A should take fixed loan and Bank b should take Flexible loan , thus there will be net saving of 2%-1.25%=0.75%
C) if this difference is equally distributed between banks than both bank can save 0.375% in dollar terms it will be =10 million *0.375% = $37500
Swap bank can earn charge for providing this service say out of net savings of 0.75% bank can take 0.25% and distribute 0.5% betwwen the banks
Particulars Bank A Bank B Quality spread difference Fixed 3% 5% 2% Flexible rate CDOR CDOR+1.25% 1.25%Related Questions
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