Consider the Borrowing Rates for Parties a and B Construct a Mutually Beneficial Interest Only Swap That Makes Money

question 34

Essay

Consider the borrowing rates for Parties A and B.A wants to finance a $100,000,000 project at a fixed rate.B wants to finance a $100,000,000 project at a floating rate.Both firms want the same maturity,5 years.
$$\begin{array} { c c c l } \text { Firm } & \text { Fixed Rate } & { \text {Floating } } \\\text { A } & \$ 10.3\% & \text { Prime } +1\% \\\text { B } & \$ 8.9 \% & \text { Prime } + 1 / 2 \%\end{array}$$ Construct a mutually beneficial interest only swap that makes money for A,B,and the swap bank in equal measure.

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Definitions:

Competitive Level

A state in a market where firms are able to enter and exit freely, and prices are determined by supply and demand.

Industry

A classification of businesses that perform similar types of work or produce similar goods and services.

Output

The total amount of goods or services produced by a company or economy.

Marginal Social Cost

Sum of the marginal cost of production and the marginal external cost.