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

question 41

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,in 5 years.
$$\begin{array} { | c | c | l | } \hline \text { Firm } & \text { Fixed Rate } & \text { Floating } \\\hline \mathrm { A } & \$ 10.3 \% & \text { Prime } + 1 \% \\\hline \mathrm { B } & \$ 8.9 \% & \text { Prime } + 1 / 2 \% \\\hline\end{array}$$ 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:

Discounted Note

A promissory note that is issued at a price lower than its face value and repaid at its face value at maturity.

Cash Proceeds

The total amount of cash received from transactions, often relating to the sale of assets or products.

Discounted Note

A financial instrument involving a loan document that has been reduced from its face value to reflect current market interest rates.

Journal Entry

A record of a business transaction in an accounting journal that details the financial implications of the transaction.