Consider the borrowing rates for Parties A and B.A wants to finance a $100,000,000 project at a fixed rate.B wants to finance a $100,000,000 project at a floating rate.Both firms want the same maturity,5 years.
$$\begin{array} { c c c l }
\text { Firm } & \text { Fixed Rate } & { \text {Floating } } \
\text { A } & \$ 10.3\% & \text { Prime } +1\% \
\text { B } & \$ 8.9 \% & \text { Prime } + 1 / 2 \%
\end{array}$$ Construct a mutually beneficial interest only swap that makes money for A,B,and the swap bank in equal measure.

Question

Consider the borrowing rates for Parties A and B.A wants to finance a $100,000,000 project at a fixed rate.B wants to finance a $100,000,000 project at a floating rate.Both firms want the same maturity,5 years.
 $$\begin{array} { c c c l } 
\text { Firm } & \text { Fixed Rate } &  { \text {Floating } } \
\text { A } & \$ 10.3\% & \text { Prime } +1\%  \
\text { B } & \$ 8.9 \% & \text { Prime } + 1 /  2 \%
\end{array}$$ Construct a mutually beneficial interest only swap that makes money for A,B,and the swap bank in equal measure.

Quizplus · Accepted Answer

The Answer of Consider the borrowing rates for Parties A and B.A wants to finance a $100,000,000 project at a fixed rate.B wants to finance a $100,000,000 project at a floating rate.Both firms want the same maturity,5 years.
 $$\begin{array} { c c c l } 
\text { Firm } & \text { Fixed Rate } &  { \text {Floating } } \
\text { A } & \$ 10.3\% & \text { Prime } +1\%  \
\text { B } & \$ 8.9 \% & \text { Prime } + 1 /  2 \%
\end{array}$$ Construct a mutually beneficial interest only swap that makes money for A,B,and the swap bank in equal measure.

Consider the Borrowing Rates for Parties a and B Construct a Mutually Beneficial Interest Only Swap That Makes Money