The Following Information Is Given Both Parties Want to Engage in an Interest Rate Swap

question 5

Essay

The following information is given:
$\begin{array}{lll}&\text { Fixed-Rate } & \text { Floating-Rate } \\&\text { Borrowing Cost } & \text { Borrowing Cost }\\\text { X Company: } & 5 \% & \text { LIBOR } \\\text { Y Company: } & 7 \% & \text { LIBOR }+1.3\end{array}$ Both parties want to engage in an interest rate swap.Assume that S Bank will arrange for an interest rate swap between X Company and Y Company for 0.1%.Also,assume that X Company gets 2/3 of the interest savings available.
a)Which company has a better credit rating?
b)What is the quality spread differential?
c)What is X Company's preferred type of debt? What rate of interest does it pay on this debt after the swap?
d)What is Y Company's preferred type of debt? What rate of interest does it pay on this debt after the swap?
e)Illustrate the cash flows from this swap.Assume that X Company pays LIBOR to S Bank.

Identify non-financial factors that influence investment decisions.

Analyze investment proposals using the internal rate of return (IRR) method.

Understand the principle of matching project cash inflows to initial outlay through payback methods.

Apply present value index techniques to evaluate investment opportunities.

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Definitions:

Animism

The belief that objects, places, and creatures all possess a distinct spiritual essence, prevalent in many ancient cultures and religions.

Limitations

Restrictions or bounds that are imposed on capabilities or activities.

Meconium

The first feces of a newborn, which is thick, sticky, and greenish-black in color.

Milk Stool

The typical appearance of an infant's feces, especially those who are breastfed, characterized by its soft, loose texture and yellowish color.