Companies X and Y both wish to raise $100 million 10-year loans. Company X wishes to borrow at a fixed rate of interest as it wants to have a certainty about its future interest liabilities, while company Y wishes to borrow at a floating rate because its treasurer believes that interest rates are likely to fall in the future. Company X has been offered a fixed interest loan at 13% and a floating rate loan at LIBOR + 2.5%. Company Y has

FINANCIAL ACCOUNTING
10th Edition
ISBN:9781259964947
Author:Libby
Publisher:Libby
Chapter1: Financial Statements And Business Decisions
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Companies X and Y both wish to raise $100 million 10-year loans. Company X wishes to borrow at a fixed rate of interest as it wants to have a certainty about its future interest liabilities, while company Y
wishes to borrow at a floating rate because its treasurer believes that interest rates are likely to fall in the future. Company X has been offered a fixed interest loan at 13% and a floating rate loan at LIBOR +
2.5%. Company Y has a better credit rating than X and has been offered a fixed interest loan at 10% and a floating rate at LIBOR + 1%. Describe through the use of a diagram how you can bring these companies
together in an interest rate swap that would make them both better off without the intervention of a swap dealer. QSD distribution: 1% benefit to Company X

 

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