Find the cheapest form of financing for the firm

Reference no: EM133584499

Problem

I. Two firms X and Y are able to borrow funds as follows:

1: Fixed-rate funding at 4% and floating rate at Libor - 1%.
2: Fixed-rate funding at 5% and floating rate at Libor + 1%.

Show how these two firms can both obtain cheaper financing using a swap. What swap would you suggest to the two firms if you were an unbiased advisor?

II. Firm A can borrow fixed rate at 10%. It can also borrow floating at Libor + 1%. The market swap rate at the bid is Libor versus 8.9% and is Libor versus 9.1% at the ask (i.e., the firm can enter into a swap by paying fixed at 9.1% or receiving at 8.9%). Find the cheapest form of financing for the firm if it wishes to be in floating-rate debt.

Reference no: EM133584499

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