Fixed-rate debt and engaged in the swap

Reference no: EM13515206

Harold Enterprises can issue floating-rate debt at LIBOR + 1% or fixed-rate debt at 12%. John Manufacturing can issue floating-rate debt at LIBOR + 1.5% or fixed rate debt at 12%. Suppose Harold issues floating-rate debt and John issues fixed-rate debt. They are considering a swap in which Harold makes a fixed-rate payment of 10% to John and John makes a payment of LIBOR to Harold. What are the net payments of Harold and John if they engage in the swap? Would Harold be better off if it issued fixed-rate debt or if it issued floating-rate debt and engaged in the swap? Would John be better off if it issued floating-rate debt or if it issued fixed-rate debt and engaged in the swap? Explain your answers.

Reference no: EM13515206

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