Calculate the quality spread differential

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Reference no: EM133115907

Company Alpha is an A-rated firm desiring to issue five-year floating-rate notes (FRNs). Company Alpha finds that it can issue FRNs at six-month LIBOR + 0.125 percent or at three- month LIBOR + 0.125 percent. Given its asset structure, three-month LIBOR is the preferred index. Company Beta is a B-rated firm that also desires to issue five-year FRNs. Company Beta finds it can issue at six-month LIBOR + 1.0 percent or at three-month LIBOR + 0.625 percent. Given its asset structure, six-month LIBOR is the preferred index. Assume a notional principal of $15,000,000.

Required:

(i) Calculate the quality spread differential (QSD).

(ii) Set up a floating-for-floating rate swap where the swap bank receives 0.125 percent and the two counterparties share the remaining savings equally.

Reference no: EM133115907

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