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What is the final cash flow for a and b

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There are two firms with different borrowing rates - Firm A can borrow floating at LIBOR + 0.5% or fixed at 10.5%; firm B can borrow floating LIBOR + 1% and fixed at 11%. Firm A will issue floating rate but it wants fixed rate; Firm B wants floating rate, but it will issue fixed rate. Firm B also makes an additional "side payment" of 0.7% to Firm A.

Problem 1: With the interest rate swap, what's the final cash flow for A and B, respectively?

Problem 2: If the side payment is 0.3% instead of 0.7%, should they still take the swap or not? Why?

Reference no: EM132965466

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