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Funding Alternatives, Swaps

2. Adelaide corporation- Adelaide corporation of Australia seeks to borrow $30,000,000 USD in the Eurodollar market. Funding is needed for two years. Investigation lead to three possibilities:

a. Adelaide Corporation could borrow the US$30,000,000 for two years at a fixed 5% rate of interest
b. Adelaide Corporation could borrow the US $30,000,000 at LIBOR +1.5% LIBOR is currently at 3.5% and the rate would be reset every six months.
c. Adelaide Corporation could borrow the US $30,000,000 for one year only at 4.5% at the end of the first year, Adelaide corporation would have to negotiate for a new one year loan.
Compare the alternative and make a recommendation

7. Xavier and Zulu. Xavier manufacturing and Zulu products both seek funding a the lowest possible cost Xavier would prefer the flexibility of floating are borrowing, while Zulu want the security of fixed rate borrowing. Xavier is the more credit worthy company. They face the following rate structure Xavier with the better credit rating has lower borrowing costs in both types of borrowing::

Xavier Zulu
Credit rating AAA BBB
Fixed rate cost
Of borrowing 8% 12%
Floating rate
Cost of borrowing LIBOR+1% LIBOR + 2%

Xavier wants floating rate debt so it could borrow at LIBOR+1% however it could borrow fixed at 8% and swap for a floating rate debt Zulu want fixed rate so it could borrow fixed at 12% however it could borrow floating at LIBOR+2% and swap for fixed rate debt what should they do?

Solution Summary

The solution compare three funding alternatives and makes a recommendation. The solution also provides an answer to a problem on interest rate swaps.