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Apple currently has an existing loan arrangement with HSBC where it pays 7% fixed rate. Apple believes that interest rates are going to decline so it wants to swap its existing fixed rate loan arrangement with a floating rate arrangement. HSBC offers a floating rate of LIBOR + 2.5 % per annum.

Samsung, on the other hand, has an existing loan arrangement with Bank Paribas where it pays a floating rate of LIBOR + 3% per annum. Samsung believes that interest rates are going to rise so it wants to swap its floating rate loan with a fixed rate loan arrangement. Bank Paribas has offered an 9% fixed rate per annum.

	Apple	Samsung
Fixed-rate borrowing cost
Floating-rate borrowing cost

Using the information above, write the fixed-rate and floating rate cost of Apple and Samsung.

Calculate the quality spread differential (QSD).

Develop an interest rate swap in which both Apple and Samsung have cost savings in their borrowing costs. Assume Apple desires floating-rate debt and Samsung desires fixed-rate debt. A swap bank is involved in the swap as the intermediary. If the cost saving for apple is 40% of the total , samsung 40% and swap bank is 20% of the total cost savings, show all your calculations and draw a diagram.

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