2. Consider Firms A and B; each firm wants to borrow $40 million for three years. Firm A wants to finance an interest-ra

[answerhappygod]

2 Consider Firms A And B Each Firm Wants To Borrow 40 Million For Three Years Firm A Wants To Finance An Interest Ra 1 (34.93 KiB) Viewed 11 times

2. Consider Firms A and B; each firm wants to borrow $40 million for three years. Firm A wants to finance an interest-rate-sensitive asset and therefore wants to borrow at a floating rate. A has good credit and can borrow at LIBOR. Firm B wants to finance an interest-rate-insensitive asset and thus wants to borrow at a fixed rate. B has less-than-perfect credit and can borrow fixed at 5.5% The borrowing terms for the two firms are as per the table below: Fixed Floating LIBOR 5% 5.50% LIBOR + 20% A B (i) (ii) What is the Quality Spread Differential? (5 marks) Structure their plain vanilla interest rate swap (10 marks)