Calculate the quality spread differential, Financial Management

Assignment Help:

Alpha and Beta Companies can borrow at the subsequent rates.

                                                           Alpha              Beta

Moody's credit rating                              Aa                   Baa

Fixed-rate borrowing cost                     10.5%              12.0%

Floating-rate borrowing cost                  LIBOR            LIBOR + 1%

1. Calculate the Quality Spread Differential (QSD).

2. Develop an interest rate swap in which both Alpha and Beta have an equal cost savings in their borrowing costs. Suppose Alpha desires floating-rate debt and Beta desires fixed-rate debt.

Solution:

1.  The QSD = (12.0% - 10.5%) minus (LIBOR + 1% - LIBOR) = .5%.

2.  Alpha requires to issue fixed-rate debt at 10.5% and Beta requires to issue floating rate-debt at LIBOR + 1%.  Alpha requires to pay LIBOR to Beta.  Beta requires to pay 10.75% to Alpha.  If this is completed, Alpha's floating-rate all-in-cost is:  10.5% + LIBOR - 10.75% = LIBOR - .25%, a .25% savings over issuing floating-rate debt on its own.  Beta's fixed-rate all-in-cost is:  LIBOR+ 1% + 10.75% - LIBOR = 11.75%, a .25% savings over issuing fixed-rate debt.


Related Discussions:- Calculate the quality spread differential

How do financial managers calculate the average tax rate, How do financial ...

How do financial managers calculate the average tax rate? Average tax rates are computed by dividing tax dollars paid by earnings before taxes (EBT).

Historical versus implied volatility, There are two ways to estimate ...

There are two ways to estimate yield volatility - historical volatility and implied volatility. Thus far we have discussed how to calculate volatility by estimati

Organization and management pattern of uti, Organization and Management Pat...

Organization and Management Pattern of UTI UTI has a full-time Chairman with an Executive Trustee reporting to him. The Executive Trustee looks after the Corporate Office, Zona

Investment strategy of hedge funds, Investment Strategy OF HEDGE FUNDS ...

Investment Strategy OF HEDGE FUNDS After the Funds are raised from genuine investors, the next step for Hedge Funds is to invest them as per the investment objectives and strat

Financial Analysis of a company, You are required to choose a company for a...

You are required to choose a company for analysis. This company should be quoted on one of the principal international exchanges. It may be your own company. You should then do the

Estimating the market value of a share, Estimating the market value of a sh...

Estimating the market value of a share The dividend expansion model suggests a method whereby share values can be estimated from information on the required return on equity an

What is translation risk, Q. What is Translation risk? This risk occurs...

Q. What is Translation risk? This risk occurs on consolidation of financial statements prior to reporting financial results and for this reason is as well known as accounting e

Calculate the rate of return, A Life Insurance Company invested $10,000,000...

A Life Insurance Company invested $10,000,000 in pure-discount U.S. bonds in May 1995 while the exchange rate was 80 yen per dollar. The insurance company liquidated the investment

Review of career plans, Review of career plans: career plans, emerging out ...

Review of career plans: career plans, emerging out of career planning exercise, have long term orientation. A career plan is developed based on assumptions about how the environmen

Write Your Message!

Captcha
Free Assignment Quote

Assured A++ Grade

Get guaranteed satisfaction & time on delivery in every assignment order you paid with us! We ensure premium quality solution document along with free turntin report!

All rights reserved! Copyrights ©2019-2020 ExpertsMind IT Educational Pvt Ltd