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Calculate the net savings

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Assume company A has comparative advantage in fixed rate loan mark and company B in float rate loan market, but A wants to pay a floating rate and company B wants to pay a fixed rate on a $10 million 5-year loan.

 

A

B

Quotes (%)

 

 

Floating

LIBOR + 0.3%

LIBOR + 0.75%

Fixed

11%

14%
Question 1: Company A is quoted 11% fixed-rate financing or a floating rate of LIBOR + 0.3%. In contrast, company B is quoted a fixed-rate financing at 14% and a floating rate financing at LIBOR + 0.75%. Calculate the net savings (in dollar amount) to both parties if a swap is entered into between A and B if B pays A 12.0% and A pays B LIBOR.

Reference no: EM132785432

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