Company X Wants to Borrow $10,000,000 Floating for 5 Years;

question 84

Multiple Choice

Company X wants to borrow $10,000,000 floating for 5 years; company Y wants to borrow $10,000,000 fixed for 5 years.Their external borrowing opportunities are shown here: $$\begin{array} { c c c } & \text { Fixed-Rate } & \text { Floating-Rate } \\&\text { Borrowing Cost } & \text { Bortowing Cost } \\\text { Compary X } & 10 \% & \text { LIBOR } \\\text { Compary Y } & 12 \% & \text { LIBOR } + 1.5 \%\end{array}$$ Design a mutually beneficial interest only swap for X and Y with a notational principal of $10 million by having appropriate values for;
A = Company X's external borrowing rate
B = Company Y's payment to X (rate) C = Company X's payment to Y (rate) D = Company Y's external borrowing rate
A.A = 10%; B = 11.75%; C = LIBOR - .25%; D = LIBOR + 1.5%
B.A = 10%; B = 10%; C = LIBOR - .25%; D = LIBOR + 1.5%
C.A = LIBOR; B = 10%; C = LIBOR - .25%; D = 12%
D.A = LIBOR; B = LIBOR; C = LIBOR - .25%; D = 12%

• A)Option a
• B)Option b
• C)Option c
• D)Option d

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Definitions:

Extraordinary Gain

A gain that arises from events or transactions that are distinct and infrequent in nature, not expected to recur regularly.

Provision For Inventories

An accounting practice where a reserve is made for potential decreases in the value of a company’s inventory.

Inventories Losses

Reductions in the amount or value of inventories due to factors such as deterioration, obsolescence, or theft, resulting in financial loss.

Lower Of Cost

An accounting principle requiring that the inventory is recorded at the lower of its cost or the current market value.