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Derivatives and Risk Management- Swaps

Company A can issue floating-rate debt at LIBOR + 1%, and it can issue fixed rate debt at 9%. Company B can issue floating-rate debt at LIBOR + 1.5%, and it can issue fixed-rate debt at 9.4%. Suppose A issues floating-rate debt and B issues fixed-rate debt, after which they engage in the following swap: A will make a fixed 7.95% payment to B, and B will make a floating-rate payment equal to LIBOR to A. What are the resulting net payments of A and B?

A. A pays a fixed rate of 9%, B pays LIBOR + 1.5%.
B. A pays a fixed rate of 8.95%, B pays LIBOR + 1.45%.
C. A pays LIBOR plus 1%, B pays a fixed rate of 9.4%.
D. A pays a fixed rate of 7.95%, B pays LIBOR.
E. None of the above answers is correct.

Solution Preview

Company A can issue floating-rate debt at LIBOR + 1%, and it can issue fixed rate debt at 9%. Company B can issue floating-rate debt at LIBOR + 1.5%, and it can issue fixed-rate debt at 9.4%. Suppose A issues floating-rate debt and B issues fixed-rate debt, after which they engage in the ...

Solution Summary

The net payments to the two parties in a floating for fixed rate swap are calculated

$2.19