What are the net borrowing costs for a and b

Reference no: EM132466223

Problem: Consider two corporations A and B. A, a high quality borrower, wishes to raise $50 million in five year floating rate funding. The company can borrow fixed rate at 5% and floating rate at Libor - 0.5%. B, a lower rated company, wishes to raise $50 million in fiv year fixed rate funding. B finds it can borrow fixed at 7% and floating at Libor +0.5%.

Suppose A borrows at the fixed rate; B at the floating rate and they both enter into a swap, whereby A pays B the Libor and receives a fixed rate of 7% - y.

(A) if y = 1.25% what are the net borrowing costs for A and B?

(B) (True/False) A and B would be better off, if they do not use swaps. Justify

Reference no: EM132466223

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