Companies X and Y have been offered the following rates per annum on a $5...
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Finance
Companies X and Y have been offered the following rates per annum on a $5 million 10-year investment:
|
| Fixed Rate | Floating Rate |
| Company X | 8.0% | LIBOR |
| Company Y | 8.8% | LIBOR |
Company X requires a fixed-rate investment; company Y requires a floating-rate investment.
- Assuming X and Y split the gains from the swap in such a way that X gets 60% of the gains and Y gets 40% of the gains, what are the net investment rates that X and Y can get?
- If a Financial Intermediary (FI) charges 0.2% a year (split equally between X and Y), how would this affect the final rates that the two parties are receiving?
- Illustrate the swap between X and Y in the presence of a financial intermediary with the help of a diagram. Please make sure that all rates are properly labeled.
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