Companies XYZ and PQR are facing the following borrowing costs: XYZ- AAA S and P rating, 3.5% fixed, floating 6 month LI
Posted: Sun May 08, 2022 10:16 am
Companies XYZ and PQR are facing the following borrowing
costs:
XYZ- AAA S and P rating, 3.5% fixed, floating 6 month LIBOR
+1%
PQR- BBB S and P rating, 2% fixed, floating 6 month LIBOR
+3%
Relative to their credit ratings, do these borrowing costs
seem plausible? Which type of loan (fixed vs. floating) should each
company pick? Suppose each company above wants to enter into
interest rate swaps. How would they do this? Discuss whether the
company goes from fixed to floating or vice versa. If possible,
also put arbitrary numbers for the interest rates that make
sense.
costs:
XYZ- AAA S and P rating, 3.5% fixed, floating 6 month LIBOR
+1%
PQR- BBB S and P rating, 2% fixed, floating 6 month LIBOR
+3%
Relative to their credit ratings, do these borrowing costs
seem plausible? Which type of loan (fixed vs. floating) should each
company pick? Suppose each company above wants to enter into
interest rate swaps. How would they do this? Discuss whether the
company goes from fixed to floating or vice versa. If possible,
also put arbitrary numbers for the interest rates that make
sense.