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

question 29

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: $$\begin{array} { l l l } & \text { Fixed-Rate Borrowing } & \text { Floating-Rate } \\& \text { Cost } & \text { Borrowing Cost } \\\hline \text { Company X } & 10 \% & \text { LIBOR } \\\text { Company Y } & 12 \% & \text { LIBOR } + 1.5 \%\end{array}$$ 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%

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Definitions:

Long-term Care Insurance

Insurance coverage designed to cover the costs of long-term care services, including both medical and non-medical needs for people with a chronic illness or disability.

Health Insurance Market

A market that deals with the selling and buying of health insurance policies, facilitating coverage for medical expenses.

Adverse Selection

A situation in which one party in a transaction possesses information that the other party does not, leading to an imbalance in the transaction that can result in market inefficiency.

Asymmetric Information

A situation in which one party in a transaction has more or superior information compared to another. This can lead to an imbalance in power and potentially unfair transactions.