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. Firm A B Fixed Rate $ 10.3% $ 8.9% Prime + 1/2% Floating Prime + 1% Construct a mutually beneficial interest only swap that makes money for A, B, and the swap bank in equal measure. Assume that Party B pays prime rate to swap bank while the swap bank pays prime rate to party A. In that situation, what rate should the swap bank pay to Party B. Show all work. A) 9% B) 8.7% C) 8.9% D) Prime + 1% E) None of the above

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. Firm A B Fixed Rate $ 10.3% $ 8.9% Prime + 1/2% Floating Prime + 1% Construct a mutually beneficial interest only swap that makes money for A, B, and the swap bank in equal measure. Assume that Party B pays prime rate to swap bank while the swap bank pays prime rate to party A. In that situation, what rate should the swap bank pay to Party B. Show all work. A) 9% B) 8.7% C) 8.9% D) Prime + 1% E) None of the above

International Financial Management

14th Edition

ISBN:9780357130698

Author:Madura

Publisher:Madura

Chapter14: Multinational Capital Budgeting

Section: Chapter Questions

Problem 30QA

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