Reference no: EM131622031

Company A desires a variable-rate loan but currently has a better deal from the fixed-rate market at a rate of 13%. If Company A borrows from the variable-rate market, the cost would be LIBOR+2%. In contrast, Company B, which prefers a fixed-rate loan, has a better deal from the variable-rate market at LIBOR+3%. If Company B borrows from the fixed-rate market, the cost would be 16%. Knowing both companies’ needs, Bank C designed a swap deal. The deal is outlined in the following:

1) Company A obtains a fixed-rate loan at 13%.

2) Company B obtains a variable-rate loan at LIBOR+3%

3) Company A pays Bank C a variable rate of LIBOR+1% and receives a fixed rate of 13.3% from the bank.

4) Company B pays Bank C a fixed rate of 14.5% and receives a variable rate of LIBOR+2.0% from the bank.

How much is the cost saving to Company A?

a. .7%

b. 1.5%

c. 1%

d. 1.3%

e. .5%