Alpha and Beta Companies can borrow for a five-year term at the following rates: Moody's credit rating Fixed-rate borrowing cost Floating-rate borrowing cost Alpha Beta Aa 11.9% SOFR +0.72% Baa 14.8% SOFR +1.72% Assuming more realistically that a swap bank is involved as an intermediary. Assume the swap bank is quoting five-year dollar interest rate swaps at 13.5-12.2 percent against SOFR + 0.72 percent. Compute the rates Alpha and Beta should pay to the swap bank in this swap, and calculate the all-in-cost of borrowing for Alpha and Beta and the earnings for the swap bank. Required: a. Calculate the quality spread differential (QSD). b-1. Develop an interest rate swap in which both Alpha and Beta have an equal cost savings in their borrowing costs. Assume Alpha desires floating-rate debt and Beta desires fixed-rate debt. Compute the rates Alpha and Beta should pay to the swap bank in this swap. b-2. Calculate the all-in-cost of borrowing for Alpha and Beta and the earnings for the swap bank. Complete this question by entering your answers in the tabs below. Required A Required B1 Required B2 Calculate the quality spread differential (QSD). Note: Enter your answers as a percent rounded to 1 decimal place. Quality spread differential % < Required A Required B1 >
Alpha and Beta Companies can borrow for a five-year term at the following rates: Moody's credit rating Fixed-rate borrowing cost Floating-rate borrowing cost Alpha Beta Aa 11.9% SOFR +0.72% Baa 14.8% SOFR +1.72% Assuming more realistically that a swap bank is involved as an intermediary. Assume the swap bank is quoting five-year dollar interest rate swaps at 13.5-12.2 percent against SOFR + 0.72 percent. Compute the rates Alpha and Beta should pay to the swap bank in this swap, and calculate the all-in-cost of borrowing for Alpha and Beta and the earnings for the swap bank. Required: a. Calculate the quality spread differential (QSD). b-1. Develop an interest rate swap in which both Alpha and Beta have an equal cost savings in their borrowing costs. Assume Alpha desires floating-rate debt and Beta desires fixed-rate debt. Compute the rates Alpha and Beta should pay to the swap bank in this swap. b-2. Calculate the all-in-cost of borrowing for Alpha and Beta and the earnings for the swap bank. Complete this question by entering your answers in the tabs below. Required A Required B1 Required B2 Calculate the quality spread differential (QSD). Note: Enter your answers as a percent rounded to 1 decimal place. Quality spread differential % < Required A Required B1 >
Intermediate Financial Management (MindTap Course List)
13th Edition
ISBN:9781337395083
Author:Eugene F. Brigham, Phillip R. Daves
Publisher:Eugene F. Brigham, Phillip R. Daves
Chapter24: Enterprise Risk Management
Section: Chapter Questions
Problem 4P
Related questions
Question
Transcribed Image Text:Alpha and Beta Companies can borrow for a five-year term at the following rates:
Moody's credit rating
Fixed-rate borrowing cost
Floating-rate borrowing cost
Alpha
Beta
Aa
11.9%
SOFR +0.72%
Baa
14.8%
SOFR +1.72%
Assuming more realistically that a swap bank is involved as an intermediary. Assume the swap bank is quoting five-year dollar interest
rate swaps at 13.5-12.2 percent against SOFR + 0.72 percent. Compute the rates Alpha and Beta should pay to the swap bank in this
swap, and calculate the all-in-cost of borrowing for Alpha and Beta and the earnings for the swap bank.
Required:
a. Calculate the quality spread differential (QSD).
b-1. Develop an interest rate swap in which both Alpha and Beta have an equal cost savings in their borrowing costs. Assume Alpha
desires floating-rate debt and Beta desires fixed-rate debt. Compute the rates Alpha and Beta should pay to the swap bank in this
swap.
b-2. Calculate the all-in-cost of borrowing for Alpha and Beta and the earnings for the swap bank.
Complete this question by entering your answers in the tabs below.
Required A
Required B1
Required B2
Calculate the quality spread differential (QSD).
Note: Enter your answers as a percent rounded to 1 decimal place.
Quality spread differential
%
< Required A
Required B1 >
Expert Solution
This question has been solved!
Explore an expertly crafted, step-by-step solution for a thorough understanding of key concepts.
This is a popular solution!
Trending now
This is a popular solution!
Step by step
Solved in 2 steps
Recommended textbooks for you
Intermediate Financial Management (MindTap Course…
Finance
ISBN:
9781337395083
Author:
Eugene F. Brigham, Phillip R. Daves
Publisher:
Cengage Learning
Intermediate Financial Management (MindTap Course…
Finance
ISBN:
9781337395083
Author:
Eugene F. Brigham, Phillip R. Daves
Publisher:
Cengage Learning