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29 Sep 2019
Alpha and Beta Companies can borrow for a five-year term at the following rates:
Alpha Beta Moodyâs credit rating Aa Baa Fixed-rate borrowing cost 10.5% 12.0% Floating-rate borrowing cost LIBOR LIBOR + 1%
QUESTIONS: 2 questions
(1) Calculate the quality spread differential (QSD).
(2) Develop an interest rate swap on behalf of the swap bank, in which the swap bank will earn a
profit of 10 basis points. In addition, Alpha and Beta would have equal cost savings by doing the
swap. Assume Alpha desires floating-rate debt and Beta desires fixed-rate debt.
Alpha and Beta Companies can borrow for a five-year term at the following rates:
| Alpha | Beta | |
| Moodyâs credit rating | Aa | Baa |
| Fixed-rate borrowing cost | 10.5% | 12.0% |
| Floating-rate borrowing cost | LIBOR | LIBOR + 1% |
QUESTIONS: 2 questions
(1) Calculate the quality spread differential (QSD).
(2) Develop an interest rate swap on behalf of the swap bank, in which the swap bank will earn a
profit of 10 basis points. In addition, Alpha and Beta would have equal cost savings by doing the
swap. Assume Alpha desires floating-rate debt and Beta desires fixed-rate debt.
Sixta KovacekLv2
29 Sep 2019