Solution-What are the net borrowing costs for a and b

What are the net borrowing costs for a and b

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Reference no: EM133118705

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 five-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 your answer in one sentence.

c. In case they decide to go with the above swap, What value of y will be more agreeable for both A and B?

Reference no: EM133118705

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What are the net borrowing costs for a and b

Reference no: EM133118705

Reference no: EM133118705

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