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

Weighted average cost of capital, Q. Weighted Average cost of Capital? ...

Q. Weighted Average cost of Capital? When the company capital structure is made from equity share capital , debenture and Preference share capital , then we calculated the comb

Explain the savage friedman hypothesis, Question: (a) Describe the axio...

Question: (a) Describe the axioms of utility. (b) An economic agent has a logarithmic utility function, U(W) = lnw and has initial wealth $20,000. She is offered the sub

Explain the meaning of buy-ins, Explain the meaning of Buy-ins This  is...

Explain the meaning of Buy-ins This  is  when  third  party  management  team  make  a  takeover  bid  and  then  run  business themselves. Finance sources are same as to buy-o

NPV, Roxanne invested $560,000 in a new business 7 years ago. The business ...

Roxanne invested $560,000 in a new business 7 years ago. The business was expected to bring in $8,000 each month for the next 26 years (in excess of all costs). The annual cost of

Calculate the cumulative probability , Compound options are usually cheaper...

Compound options are usually cheaper than vanilla options and we know that there are four main types of compound options: a call on a call; a put on a call; a call on a put; a put

What is simply offensive and what is humour, a) Ethics can be a rather prej...

a) Ethics can be a rather prejudiced matter; whether it is ethical to market products directly at children depends on several factors: The age of the children being targeted

Assets, Assets Pension insurance companies' assets can be divided into ...

Assets Pension insurance companies' assets can be divided into five main investment classes: cash, long-term bonds, stocks, property and loans. The total returns on the assets

Financial services industry role, For this assessment, you will be required...

For this assessment, you will be required to select a role within the financial services industry that interests you. Undertake your own research to find out about the role you hav

Warrant, It is a long-term call option to purchase common stock at a specif...

It is a long-term call option to purchase common stock at a specified price.

Illustrate methods to manage cash resources, Q. Illustrate Methods to Manag...

Q. Illustrate Methods to Manage cash resources? There are several methods which may be of use in managing resources. The particular tool selected will depend on its reliability

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