Two companies would like to borrow money. Company A is offered a fixed rate of 4% and afloating rate of the BA rate (= the current yield on Bankers' Acceptances) + 0.4%. Company B isoffered a fixed rate of 6% and a floating rate of the BA rate + 1.4%. Given this information, which of the following statements is correct?

Question

Quizplus · Accepted Answer

Both companies can benefit from a swap given this information. Company A can benefit from swapping their fixed rate of 4% for Company B's fixed rate of 6% because Company A has a lower fixed rate. Company B can benefit from swapping their floating rate of BA rate + 1.4% for Company A's floating rate of BA rate + 0.4% because Company B has a higher floating rate. Therefore, a swap would be mutually beneficial for both companies.

Two Companies Would Like to Borrow Money