Interest Rate Swaps ABC Company and XYZ Company need to raise funds to pay for capital...

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Finance

Interest Rate Swaps ABC Company and XYZ Company need to raisefunds to pay for capital improvements at their manufacturingplants. ABC Company is a well-established firm with an excellentcredit rating in the debt market; it can borrow funds either at 11percent fixed rate or at LIBOR + 1 percent floating rate. XYZCompany is a fledgling start-up firm without a strong credithistory. It can borrow funds either at 10 percent fixed rate or atLIBOR + 3 percent floating rate.
a. Is there an opportunity here for ABC and XYZ to benefit bymeans of an interest rate swap?
b. Suppose you’ve just been hired at a bank that acts as adealer in the swaps mar-ket, and your boss has shown you theborrowing rate information for your clients, ABC and XYZ. Describehow you could bring these two companies together in an interestrate swap that would make both firms better off while netting yourbank a 2 percent profit.
**can you please show work or data

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4.4 Ratings (875 Votes)

LIBOR1LIBOR1Market1050LIBOR25101010MarketABC borrows from market and pays LIBOR1It passes on the same loan See Answer

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Interest Rate Swaps ABC Company and XYZ Company need to raisefunds to pay for capital improvements at their manufacturingplants. ABC Company is a well-established firm with an excellentcredit rating in the debt market; it can borrow funds either at 11percent fixed rate or at LIBOR + 1 percent floating rate. XYZCompany is a fledgling start-up firm without a strong credithistory. It can borrow funds either at 10 percent fixed rate or atLIBOR + 3 percent floating rate.a. Is there an opportunity here for ABC and XYZ to benefit bymeans of an interest rate swap?b. Suppose you’ve just been hired at a bank that acts as adealer in the swaps mar-ket, and your boss has shown you theborrowing rate information for your clients, ABC and XYZ. Describehow you could bring these two companies together in an interestrate swap that would make both firms better off while netting yourbank a 2 percent profit.**can you please show work or data