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2. Companies X and Y have been offered the following rates per annum on a $5 million 10-year investment: Fixed Rate Floating Rate Company X 8.0% LIBOR Company Y 8.8% LIBOR Company X requires a fixed-rate investment; company Y requires a floating-rate investment. Design a swap that will net a bank, acting as intermediary, 0.2% per annum and will appear equally attractive to X and Y.

Sagot :

Advertising, sales promotion, or public relations are frequently used in mass selling. The two firms' combined effective return will be X = 8% + 0.3% = 8.3%. LIBOR + 0.3% = Y = LIBOR + 0.3% where investments with fixed rates (x) and adjustable rates (y) are made.

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Briefing:

Total return if Company X invests at Fixed rate and Y borrows at floating rate = 8% + LIBOR = LIBOR + 8%

total return if X invests at floating rate and Y invests at fixed rate under swap = LIBOR + 8.8% = LIBOR + 8.8%

Gain under swap = 0.8%

Intermediary = 0.2%

Shared by each company = 0.6%/2 = 0.3%

Effective return will be

X = 8%+0.3% = 8.3%

Y = LIBOR + 0.3% = LIBOR + 0.3%

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