Problem 3: (10 points) Swaps Suppose that two companies, Etisalat and DU both wish to borrow $1 million for 5 years and

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Problem 3: (10 points) Swaps
Suppose that two companies, Etisalat and DU both wish to borrow
$1 million for 5 years and have been offered the rates shown in
below:
Etisalat Fixed 4.0
Floating L –
0.4
DU
Fixed 6.0 Floating
L + 0.6
Etisalat has a AAA credit rating; DU has a BBB credit rating. We
assume that DU wants to borrow at a fixed rate of interest, whereas
Etisalat wants to borrow at a floating rate of interest linked to
6-month LIBOR. DU Corp pays a higher rate of interest than AD Corp
in both fixed and floating markets.